ulllslatm ibrn kxv ldc r & AlnandcI designs and impkmcm integrated in- s u n n u and risk management pognms globally. Wc have the

. . r c k d communicatio~, and informadon techdogics.

ACG also otfQs brol;cngc senices for p u p health and w c k , s p e d risk, and orecutive planning insunncc covcngcs.

Financial Hiuhliuhts

1995 1994 1993

Ipmtinj ksults; Operating Revenues $1,282.4 $1,323.9 $1,341.6 Operating Income (Loss)(') 122.7 (82.9) 52.3 Other Income (Expenses) ('1 33.3 (63.9) (20.4) Income (Loss) from Continuing Operations 89.4 (107.2) 23.6 Loss from Discontinued Operations - (28.9) - Cumulative Effect of Change in Accounting - (2.6) 3.3 Net Income (Loss) 89.4 (138.7) 26.9 Earnings (Loss) Attributable to

Common Shareholders 64.0 (153.8) 20.7

Per Share Information: Primary Earnings (Loss) Per Share $ 1.44 $ (3.51) $ .48 Fully Diluted Earnings (Loss) Per Share 1.42 (3.51) .48 Cash Dividends Per Common Share .lo ,325 1.00

Other Data: . Average Common and Common Equivalent

Shares Outstanding 44.6 43.8 43.4 Average Common and Common Equivalent Shares

Outstanding, Assuming Full Dilution 57.1 43.8 43.4 Number of Employees (thousands) 11.9 13.3 14.5

lu Inrlvdrr nmurtwitiq and rpcn'al rbaas of $17.6 rniUion a d $69 million in 1995 and 1994, rrrprrti~dly (ur Note 3 of Notrr to Finanrid StafcwntsJ.

@I Includw rpsrial rbawprirrarily nlatd t o c o n t i n p q rm&ncntr and otbw indrnrniry rom of $69.7 rniUion in 1994. A h inclndcraainr mt ralrr of non-rac bwincacr ofS30.4 n&n in 1995, $20.2 rnillim in 1994 and $3.9 m i h in 1993 (rcc Notu 2 and 3 ofNora to Financial Smtcncnts).

1995 Revenue by Core Business:

-- Management Specialist and

Consulting-16% Reinsurance Broking-24%

All Other- 12%

Asia Pacific-7%

To My Fellow Stockholders

1995, Alexander & Alexander completed its restructuring, significantly improved sales and service capabilities, and resumed growing core business revenues and profits during some of the toughest business conditions in memor)!

Financial benchmarks tell part of

the story, beginning with record net income of $89.4 million. On a comparable basis with 1994:

9 A&A's operating margin was 10.8 percent-up 9.1 per- centage poinrs.

Revenues rose 4.4 percent. Expenses fell 5.2 percent. 9 Year-to-year operating income

increased $114.8 million.

Our 1994 restructuring program provided the foundation for much of our progress. On the expense side, savings of more than $100 million were realized, and millions more reallocated to sales

and service initiatives. Major longstanding contingencies were resolved. A larger, more flexible $200 million, three- year revolving credit facility was established with a group of 13 major banks. By the end of the first quarter of 1995, A&A emerged from the restructuring with a strong cash position, a

strengthened balance sheet and significantly better pros- pects for renewed growth.

W~th the restructuring behind us, our focus has shifted to the

more exciting and satisfying objectives ofwinning and

servicing our clients while producing markedly better operating results. By year end, we had achieved every major target, resulting in across-the-board operating income improvement.

Approximately half of our retail

brokerage and risk manage- ment consulting revenues are generated in the United States. Lower operating costs drove U.S. retail operating income up nearly $40 million

from last year before restruc-

every major target, turing and special charges. In fact, operadng income improved in retail operations resulting in across-the-board ,und,wor,,th a

1 operating income boost from major new busi- ness gains and acquisitions,

operating income growth

was especialiy strong in Canada, Latin America,

Continental Europe and the Asia Pacific region.

perating income at Alexander Howden Group, A&A's specialist and reinsurance broking operation, rose on record revenues of more than $300 million. At the Alexander Consulting Group, our human resource consulting company, oper- ating income improved $172 million on lower operating expenses.

In 1996, further gains from

expense savings and revenue growth will be partly offset by AM'S heavy investments in information technology, product development and employee training. These

investments should lead to improved financial results in 1997 but will be a drag

on profits in the short term. We are prepared m trade a degree of short-term gain to protect and enhance the Company's long-term competitive position and to better serve our clients.

e operate in an industry W that is beginning to address the effects of years during which, by and large, it did not keep pace with the changing needs of clients. Now underwriters are shoring up their balance sheets while emphasizing new product development. They are abandoning a "take it or leave it" service mentality that b e many traditional insurance buyers into alternative markets.

Broken face similar challenges. In a slow-growth, higbly competitive environment, commission-based income

has been driven down by weak insurance prices. Meanwhile, client demand for value puts added pres- sure on all brokers m hold down costs while improving the quality and variety of products and services.

There is no such thing as a cozy, long-term client relationship. Sawy about their risk man- agement needs and mindful of their corporate financial objectives, risk managers are more 'keiy to use the renewal process as an oppor- tunity m determine that they have the best and most cost-dfcctive ways of deal- ing with risk. As a result, account m o v e r rates have been increasing through- out the industry. Brokers and underwriters who have

the right product, strong

financial footing and leader- ship will emerge on top of the indusuy.

A mature industry characterized by dower gmwth, excess capa- aty and rising dent expec- tations spells opportunity for A&A. Our competitive advantages begin with our willingness to inn-, m do things difTerently. For exam- ple, we have refined a sales- driven strategy of providing middle market clients with Low-cost, segment- specific products ofthe best possible quality. We are serving this important part of our business with increas- ingly sophisticated informa- tion technology, a proven business segmentation suavgy and vigorous new product d&elopment.

Clients having larger and more complex risk management needs will require compre- hensive advisory s e ~ c e s that can help reduce their overall cost of risk. AM'S arsenal for larger accounts indudes a consultative approach integrating risk assessment, risk finance, mitigation and administration. Although we will sometimes use

capital market alternatives, we are working with some of the world's leading in- surance markets to develop insurance-based products that will continue to pm- vide our d i e m with cost- effective, tax-advantaged risk transfer. A good example of . a breakthrough insurance product is BETA, a high excess multiline, multiyear

risk aansfer product dcvcl- oped by AM'S Alexander Capital Consultants in conjunction with Swiss k.

hese saategies will be supported T with an A&.4 "infrasrmcture" that includes re-engineered work pmcesses, information technology and the growing intellectual capital of our employees. Thmugh a pm- gram we call the A&A Way, we are capturing our best business practices and apply. ing them on a Fast, custom- izcd basis for clients and prospective clients. A Mid- western pilot pmject using A&A Way pactices and a cennalized risk transfer

center has consistently ob-

tained significantly higher account renewal rates and

better operating margins.

he A&A Way is one component T of a worldwide information technology investment of approximately $45 million in

1995. We are expanding our global I T infrastructure,

building common messaging

links with offices around the

world and adding links with

clients through so-called

"groupware." A&A also par- ticipated in the formation of

theworld InsuranceNetwork, an electronic bridge that

will standardize, streamline

and accelerate data trans-

mission between broken

and insurance markets.

To equip our employees t o work

in this environment, addi-

tional resources have been

devoted to training and

professional development.

Most U.S. employees have

attended A&A Way process

"industry conditions spell

opportunity for A&A"

training, and thousands

more worldwide are improv ing their technical, market-

ing and servicing skills.

This kind of investment is

necessary ifyou plan - as we d o - t o become a leader

in all of our markets in the eyes of our clients, employees

and shareholders.

Innovation is not confined to our

retail operations. Client de-

mand for increasingly sophis- ticated solutions prompted

the Alexander Howden Group to form Alexander

Howden Developments.

This new unit combines

several areas of analytical

expertise to assess risk expo-

sures and accumulations,

evaluate retention capabilities

and investigate alternative programs. Similar cnergy is

evident at the Alexander

Consulting Group, which is

reshaping its core businesses

of health care and compen- sation, retirement planning

and human resource infor- mation technologies.

These initiatives are expected to

boost future revenues and

profitability. Meaningful

growth is more likely to

result from acquisitions. For

this reason, we continue t o explore potential acquisitions

or strategic alliances that

will help us deliver the best

possible products and ser-

vices, or fill a regional or segment niche. We achieved

these objectives with the October acquisition of most

of the US. operations of

Jardine Insurance Brokers,

Inc. The transaction in-

creased our market share in

the West, particularly Cali- fornia, while adding talent-

ed professionals in the areas

of health care, agribusiness

and other practices. Larger strategic acquisirions will be

considered as our industry

consolidates and as we

evaluate options in related

financial services

A &A's progress throughout the

year benefited from the

experience and leadership

provided by the Board of

Directors. Importantly, A&A directors have been person-

ally involved in supporting our business objectives,

including business develop-

ment. In January 1995, the

Board voluntarily eliminated cash compensation for its

non-employee members in favor of an equity compcn-

sation plan. Their interests are now fully linked with

the interests of all A&A

shareholders, which is the

way it should be.

N ew members since January 1995 include:

H. Furlong Baldwin, Chairman & CEO of Mercantile Bankshares Corporation.

E. Gerald Corrigan, Chairman, International Advisors, Goldman, Sachs & Co. and I former CEO of the Federal Reserve Bank of New York.

Mcnbrrr ofA&A+ offirc oftbe Chairman: Elliot CoopI*Mnc, Ron Ih, h n i s Makonq,

Ronald A. Iles, Deputy Frad Zarb, Km D a ~ and Ea Konrik.

Chairman of A&A Services . Inc. and Chairman of Alexander Howden Group Limited.

m Edward E Kosnik, Senior Executive V~ce President

the Board recognized outstanding achievement by talented executives

and ChiefFinancial Officer, who represent one of the A&A Services Inc. strongest management

teams in the industry. They In October, the Board approved will work with me in A W s

five senior-level appoint- Office of the Chairman. ments, including that of Ron Iles as Deputy W hile we do not expect the Chairman. Ed Kmnik was market to improve in the elected Senior Executive short term, I have never Vice President. Three new been more confident of Executive V i e Presidents our ability to become a

. - are Elliot S Cooperstone, leader in every region and Chief Administrative in every segment where we Officer, A&A Services do business. We have the

ants before the industry completes its consolida- tion and the ultimate win- ners emerge. As I recently told our employees, the important thing to remem- ber is that there wiU be winners. And A&A will be among them.

Frank G. Zarb Inc.; Kenneth J. Davis, Chairman, Global Retail Board; and Dennis L.

Mahoney, Deputy 1 Chairman and Gmup CEO

of the Alexander Howden

people, the resources and the strategy to make our Chairman of the Board, way thmugh a challenging President & period that will severely ChiefExecutive Officer test all brokers and consult-

March 29,1996 Gmup. In each instance,

Financial Contents

Selected Financial Data

Management's Discussion

and Analwis

Report of Management

Independent Auditors' Report

Consolidated Statements

of Operations

Consolidated Balance Sheets

Consolidated Statements

of Cash Flows

Consolidated Statements of

Stockholders' Equinr

Notes to Financial Statements

Selected Financial Uata

The following Selected Consolidated Financial Data is presented in accordance with generally accepted accounting principles. This data should be read in conjunction with the financial statements and accom- panying notes included elsewhere herein.

-- 1995 1994 1993 1992 1991 - ~p

Operating Results: Operating Revenues $1,282.4 51,323.9 51,341.6 51,369.5 $1,385.1 Operating Income (Loss)lll 122.7 (82.9) 52.3 85.5 16.4 Other Income ( E x p e n s e s ) ~ ~ ~ 33.3 (63.9) (20.4) 17.4 (22.8) Income (Loss) from Continuing Operations 89.4 (107.2) 23.6 57.1

- (9.5)

Loss from Discontinued OperationsI3l (28.9) - (145.0) - Cumulative Effect of Change in

Accounting - (2.6) 3.3 - (2.2) Net Income (Loss) 89.4 (138.7) 26.9 (87.9) (11.7) Earnings (Loss) Attributable t o

Common Shareholders 64.0 (153.8) 20.7 (87.9) (11.7)

Per Share Information: Primary Earnings Per Share:

Income (Loss) from Continuing Operations $ 1.44 5 (2.79) S .40 5 1.32 S (.22) Loss from Discontinued Ooerations - 1.66) - 1.3.35) -

\ - ~ , , - ~ - ~ , Cumulative Effect of Change in Accounting - .08 - (.06)- -- - . (.05) Net Earnings (Loss) $ 1.44 $ (3.51) 5 .48 S (2.03) $ (.27)

~ .- - -

Full\, Diluted Earnines Per Sharc: - Income (Loss) from Continuing Opcrntions $ 1.42 $ (2.79) 5 .40 5 1.32 S (.22) Loss from Discontinued Operations - (.66) - (3.35) - Cumulative Effect of Change in Accounting - -

- .08 (.06) - - (.05)

Net Earning-ss) - ~ -- $ 1.42 5 (3.51) 5 .48 5 (2.03) -~ S -- (.27) Cash Dividends Per Common Share .10 ,325 1.00 1 .OO 1 .OO

financial Position: Total Assets $2,942.4 $2,945.7 $2,793.8 52609.6 $2,737.8 Worlung Capital 251.5 237.6 186.2 191.7 172.6 Long-term Debt 126.2 132.7 111.8 125.1 169.9 Stockholders' Equity 402.6 317.5 276.2 185.5 370.1

Other la la : Average Common and Common Equivalent

Shares Outstanding 44.6 43.8 43.4 43.2 43.1 Average Common and Common Equivalent

Shares Outstanding, Assuming Full Dilution 57.1 43.8 43.4 43.2 43.1 Cash Dividends Paid: 141

Common Stock $ 4.4 .B 14.3 5 41.7 $ 40.9 $ 40.6 Series A Preferred 8.3 8.3 6.2 - -

Mana~ement's Oiscussion and Analvsis

Overview Alexander & Alexander Services Inc. (the "Com- pany") provides professional risk management consulting, insurance brokerage and human resource management consulting services from offices in more than 80 countries. The Company's principal industry segments are ( i) insurance services, coni- prised of risk management and insurancc brokiug services and specialist and reinsurance broking, and (ii) human resource management consulting.

Since mid-1994, management of the Company has implemented significant changes, including a restructuring program aimed at expense reduction and process improvement, a broad-based cash and stock compensation program tied to individual performance and increasing stockholder value, as well as investments in the Company's ini&rnmtion technology systems and training programs. In ad- dition, the Company reduced its financial exposures to various longstanding litigation and other contin- gencies and sold various non-core businesses.

Management belicvcs that such actions were necessary In order t o stabilize the Company, to

improve margins and tinancial performance, and to effectively reposition the Company to meet the challenges of an increasingly competitive busi- ness environment, the evolving needs and demands of its clients, including a trcnd toward fee based remuneration, and the renewed trcnd towards industry conx)lidation.

The Company's revenues arc generally derived from commissions and fees and can be affected by pricing and seasonality. The Company's insurance broking revenues are generally impacted by overall available market capacity and premium rates charged by insurance companies. Fee arrangements are he- coming more prevalent on large risk managcment accounts. Insurance broking commissions and fee growth continue to be constrained, particularly in the US. , due to soft pricing and excess market ca- pacity and the resultant intense competition among insurance carriers and brokers tor market share. These market conditions arc becoming increasingly evident in the U.K., Continental Europe and in other parts of the world. In addition, changing client demands and needs in the U S . have resulted in higher account turnover rates within the industry.

During 1996, soft market conditions arc

expected to continue in most liability coverages. Partially offsetting this trend arc anticipated harden- ing conditions for selected catastrophe coverages. The Company anticipates modest broking revenue growth for its insurance broking operations in 1996.

Revenue growth from the Company's human resource managcment consulting operations was constrained in 1995 by the impact of the Company's restructuring initiatives. Moderate growth is expec- ted for this segment in 1996.

The timing and realization of revenues are also affected by the timing of renewal cycles in different parts n T h c world and lines of business. This pro- duces a degree of seasonality in the Company's results. Broking revenues fix risk management and insurance broking services arc strongest during the first quarter for Continental Europe and strongest in the U S . and Asia-Pacific during the fourth quar- ter. Sprcialist and reinwranrc brokmg rcvenues are strongest in the tirst and second quarters. Revenues for human resource management consulting are typi- cally strongest in the fourth quarter and weakest in the first quarter.

In addition to comn~issions and fees, the Company derives revenues from investment income earncd on fiduciary funds. Despite a rise in world- wide interest rates in 1995, the trcnd in recent years has been downward. There is also pressure from insurance companies to shorten the time that fidu- ciary finds are held prior to remittance to carriers. Investment income earned on fiduciary funds during 1996 is anticipated to remain near 1995 levels.

Revenue growth of the Company's industry segments will depend increasingly on the develop- nient of new products and services, new business generation and selective acquisitions.

In October 1995, the Company purchased most of the U S . insurancc broking and consulting busi- ness of Jardine Insurance Brokers, Inc. (the JIB acquisition). The Company will continue to evaluate domestic and international geographical market expansion possibilities and further industry special- ization. Furthermore, the Company is considering additional possible niche and substantial strategic acquisitions relating to its core businesses, as well as other opportunities in the financial services in- dustry. As part of its evaluation of opportunities, the Company engages with interested parties in discussions concerning possible transactions. The

Company will continue to evaluate such opportuni- ties and prospects. However, the Company cannot predict if any transaction will be consummated, nor the terms or form of consideration required. Nor can the Company predict, if any such transaction is consummated, what the financial benefit, if any, will bc to the Company.

Overall, comparable operating expenses declined significantly in 1995, resulting from implementing the 1994 plan of restructuring and other expense initiatives. The Company realized over $100 million of expense savings from these efforts. Approximately one-half of these savings were reinvested in the Company in the form of new technology, products and personnel to support revenue growth, or absorbed through intlationary increases in costs. The Company plans t o continue such investments in 1996 which will slow short-term profit growth.

Summary The Company reported net income of $89.4 mil- lion, or $1.44 per sharc for 1995. Fully diluted earnings per share for the period were $1.42. Included in the results is an after-tax gain of $18.7 million, or $0.42 per sharc, from the sale of Alexsis Inc., the Company's U.S.-based third party claims administrator and a pre-tax charge of $17.6 million ($11.2 million after-tax or $0.25 per sharc) primarily associated with the JIR acquisition in the fourth quarter.

In 1994, the Company reported a net loss of $138.7 million, or $3.51 per share on a primary and fully diluted basis. Included in the results were after-tax charges for restructuring, contingency settlements and other reserves of $106.6 million, or $2.43 per share, an after-tax gain of $12.5 million, or $0.28 per share, from the sale of the Company's US-based personal lines insurance broking business, and after-tax charges of $28.9 million, or $0.66 per share, relating to certain in- demnity obligations and exposures of the Com- pany's discontinued operations.

In 1993, net income was $26.9 million, or $0.48 per share on a primary and fully dilutcd basis, including after-tax gains of $2.3 million, or $0.05 per share, from the sale of three small operations and a gain relating t o a cumulative effect adjustment of $3.3 million, or $0.08 per share, from a changc in accounting for income taxes.

The following discussion and analysis of signifi- cant factors affecting the Company's operating results and liquidity and capital resources should be read in conjunction with the accompanying tinancial statements and related notes.

Consolidated Opevating Revenues Consolidatcd operating revenues for 1995 were $1,282.4 million compared to $1,323.9 million for 1994. The sale of non-core businesses reduced rev- enues by approximately $109 million in 1995 com- pared t o 1994. Partially offsetting this decline was $8.5 n~illion from the favorable effects of changes in hreign currency ratcs. The JIB acquisition in the burtl i quarter of 1995 increased revenues by approximately $1 1.5 n~illion.

Excluding the effects of these items, total rev- cnucs incrcased by $47.5 million, or 3.9 percent, on a comparable basis. Consolidated operating revenues decreased in 1994 by $17.7 million, or 1.3 percent, versus 1993.

Total 1995 commissions and fees were $1,219.5 million compared to $1,272.3 million in 1994, a decrease of $52.8 million, or 4.1 percent. Total 1994,comniissions and fees decreased from 1993 levels by $15.4 million, or 1.2 percent. The sale of non-core businesses reduced such revenues in the 1995 and 1994 comparable periods by approxi- mately $106.5 million and $8.4 million, respectively. The favorable effects of changes in foreign currency ratcs incrcased commissions and fees by $7.9 million and $0.5 million in 1995 and 1994, respectively. Additionally, the impact of acquisitions increased these revenues by $1 1.2 million and $7.2 million in 1995 and 1994, respectively.

After adjusting for the effects of these items, total commissions and fees increased by $34.6 mil- lion, or 3 percent, in 1995 versus a decrcasc of $14.7 million, or 1.3 percent, in 1994 versus 1993.

Fiduciary Investment Income Investment income earned on fiduciary funds in- crcascd by $1 1.3 million, or 21 .9 percent, in 1995 primarily due to higher annual average yields achieved, particularlv on its U.S. dollar and U.K. pound stcrling portfolios.

In 1994, fiduciary investment income declined by $2.3 million, or 4 .3 percent, versus 1993 primar- ily due to a reduction in the average size of portfo- lios, particularly in the U.S.

The Company enters into interest rate swaps and forward rate agreements to limit the earnings volatility associated with changes in short-term intcrest rates on its existing and anticipated fidu- ciary investments. In addition, as part of its interest rate management program, the Company utilizes various types of interest rate options, including caps, collars, tloors and intcrest rate guarantees. These financial instruments increased the Company's fidu-

thirteen

ciary investment income by $1 million in 1995, $0.2 million in 1994 and $2.2 million in 1993. For additional information relating t o the Company's interest rate financial instruments, see Note 12 of Notes to Financial Statements.

The majority of the Company's fiduciary funds investment portfolio is invested in securities with short-term maturities; as a result, the Company's level of fiduciary investment income is closely associ- ated with changes in short-term, worldwide interest rates, primarily in the United States and United Kingdom. Excluding the impact of derivative finan- cial instruments, a one percentage point change in worldwide interest rates could affect the Company's level of fiduciary investment income by approxi- mately $8 million.

The Company generally enters iuto derivative instruments to hedge its exposure to interest rate changes up to a three year period. The approximate net amount of the fiduciary investment portfolio that has been hedged using derivative instruments, and the effective fixed rate of return the Company will receive o n those hedges, is summarized below:

For the Ycars Ended Dcccmbcr 31, 1996 1997 1998

Net Value Hedged $138.6 $184.2 $68.7

Effective Interest Rate 8.9% 7.2% 7 . 2 4

Because these derivative instruments have effectively locked in a fixed interest rate on a portion of the fiduciary funds portfolio, the Company's fiduciary investment income is not as impacted by short-term interest rates as would otherwise be the case. For example, a one percentage point change in worldwide market interest rates would, as cited above, affect fiduciary investment income and related cash flows by approximately $8 million; however, the impact is reduced to approximately $7 million in 1996 when the financial hedging instruments are included.

A change in the level of short-term, world\vide interest rates would also result in a change in the fair market value of the Company's portfolio of derivative financial instruments. At December 31, 1995, the fair market value of all interest rate deri- vative financial instruments was approximately $6.8 million, representing the economic gain the Company could have realized if the Company ter- minated all interest rate derivatives on that date. If interest rates at December 3 1 , 1995 had been one percentage point higher, the fair market value of all interest rate derivatives would have been ap- proximately $3 million. Likewise, if intcrcst rates had been one percentage point lower, the fair mar- ket value of all interest rate derivatives would have been approximately $10 million.

Opevatinn Expenses Consolidated operating expenses for 1995 were $1,159.7 million compared to $1,406.8 million in 1994. Excluding the 1995 special charges and the 1994 restructuring charges and the 1994 non re- curring charges described below, total operating expenses declined by $150.9 million, or 11.7 per- cent. lirflected in this decrease was the effect of the sale of non-core businesses which reduced total operating expenses by approximately $102.8 million on a comparable basis. Partially offsetting this de- cline was the negative impact of changes in foreign currency rates, and the fourth quarter JIB acquisi- tion which increased total expenses by $9.3 million and $1 1.2 million, respectively.

Excluding the effects of these items, total expen- ses decreased $68.6 million, or 5.6 percent, on a comparable basis.

Crrnsolidated operating expenses increased by $117.5 million, or 9.1 percent, in 1994 versus 1993. Excluding the restructuring charges described below, total operating expenses increased in 1994 by $48.5 million, or 3.8 percent. In 1994, total operating expenses increased by $50.3 million after adjusting for foreign currency fluctuations and the effects of acquisitions and dispositions.

Salaries and Benefits Consolidated salaries and benefits decreased by $79.2 million, or 9.7 percent, in 1995 versus 1994. Excluding the effect of changes in foreign currency rates, a $59.2 million decrease resulting from the sale of non-core businesses, the fourth quarter JIB acquisition and ihe 1994 increase due to additional incentive and benefit expenses, total salaries and benefits decreased by $24.5 million, or 3.3 percent, versus 1994. Contributing t o this decrease was a 3.9 percent decline in headcount, excluding the impact of acquisitions and dispositions, primarily due to early retirement programs and worldwide work- h r c e reductions pursuant to the Company's 1994 plan of restructuring. Also reflected in thr dccrcase were lowcr employee benefit costs resulting from the Company's expense reduction initiatives. Somewhat offxtting these items was an increase in incentives attributable to improved sales and profit perfor- mance coupled with the implementation of several new long-term incentive cornpensatinn plans and normal salary progressions.

Consolidated salaries and related benefits in- creased by $29 million, or 3.7 percent, in 1994 versus 1993. The increase reflects $10.1 million of additional incentive and benefit expenses in 1994 representing a combination of amendments to exist- ing incentive plans, payments required to certain

fourteen

employees in the U.K. due to the modification of employment terms and a special compensation award to a director.

Also contributing to the 1994 change was an additional $9.1 million of salaries and benefits result- ing from the 1993 Mexico acquisition and from the Novcmbcr 1993 pooling of interests acquisitir~n of Clay & Partners (Clay).

Excluding the effects of these items and a de- crease due t o the effect of sold operations, salaries and benefits increased $16.4 million over 1993 Iev- cls. Staff costs for 1994 also retlectcd nornmal salarv progressions and higher benefit costs, partially offset by a decline in headcount of 8.3 percent in 1994. Perhrmance-based incentive costs declined by S4.8 million in 1994.

The Company will adopt SFAS No. 123, "Accounting h r Stock Based Ompensation," in 1996. The G m p a n y has elected to continue to measure compensation costs using AI'B Opinion No. 25 and accordingly will provide the disclosures required by SFAS No. 123.

Other O p e r n t i n ~ Expenses Consolidated other operating expenses for 1995 werc $407 million compared to $523.5 million h r 1994, a decrease of $1 16.5 million, or 22.3 percent. The sale of non-core businesses reduced expenses by approximately $43.6 inillion in thr comparable periods. Partially offsetting this decline was the negative impact of changes in fnrcign currcncv mtes, i~icluding hedging contracts gains and losses, and the h o r t h quartcr JIR acquisition which increased other operating expenses by $2.6 million and $3.3 million, respecti\+

Afer adjusting for the effects of these items, to- tal other operating expenses decreased $78.8 niillion, or 16.5 percent, in 1995 versus 1994 on a corn- parable basis.

Contributing to this decline was the implc- mentation of the 1994 plan of restructuring and other expense initiatives, including tightening of travel and entertainment practices, elimination of certain emplovee perquisites and the consolida- tion of vendor and supply manngcmmt. Addition- ally, this decrcase reflects lower insurance costs primarily related to the Company's professional indemnity programs.

In 1994, the Company provided $29.2 million, including $24.9 n~illion in the fourth quartcr, of additional reserves relating t o the settlement of ccr- tain large litigation matters and reserve strcngthcn- ing. In addition, higher system development costs

were reflected in 1994 due to the standardization and autrrmation efforts underway in the U.S.

Consolidated other operating expenses increased by $19.5 million, or 3.9 percent, in 1994 versus 1993. Excluding the negative impact of changes in foreign exchange rates and acquisitions and dis- positions, othcr oprrating expenses increased by $19.3 million, or 4.3 percent, in 1994 vcrsus 1993.

Insurance costs rctlcct third-party insurance pre- miums and self-insurance reserves for the Company's professional indemnity programs. The Company believes its insurance-related reserves are sufticient to cover potential claims and liabilities; however, there is no assurance that escalating litigation costs and awards, as well as insurance company insolvencirs, will not have an adverse impact on the f i~ t i~ re overall cost of insurance coverages.

The Company adopted SFAS No. 106, "Em- ployers' Accounting h r Postretirement Rcncfits Other than Pensions" effective Ianuary 1, 1993 b r its U.S. plans and effective January 1, 1995 for its international plans. This statmicnt requires the Company to accrue the estimated cost of future retiree benefit payments during the ycars the em- ployee prnvidcs services. The Company previously expensed the cost of thcse henrtits, which are princi- pally health care and life insurance, as pren~iums or claims werc paid. Thc Company elected to recog- nize the initial postretirement bcnefit ohligation of

$14 million and $5.9 million for its U.S. plans and international plans, rcspccti\dy, aver a period of nventy years.

R e s t i ~ u c t u r i n ~ nnd Specinl C b n i p I11 the tburtli quarter of 1995, the Company record- ed a $17.6 million prc-tax chargc ($11.2 million after-tax or $0.25 per share) related primarily to the IIR acquisition. The IIR portion of this chargc amounted to $13 million of which $12.5 million rctlects the anticipated cnsts asxxiated with the abandonment of certain of the Company's office spacc and the rcmain~ng balance reflects the antici~ patcd costs assnciated with involuntary workfnrcc reductions. The lease liability will be paid nut through the year 2007. The remaining $4.6 millinn of the charge primarily represents costs associated with other involuntary workfnrcc reductions in thc U.S.

In the fourth quarter of 1994, management committed tn a tbrmal plan of restructuring the Company's operations and recorded a S69 niillion pre-tax chargc ($45.1 million afier-tax or $1.03 per share). The restructuring charge included $25.2 million tu consolidate real estate space require- mcnts at 48 offices worldwide, and $43.8 million fix

fifteen

voluntary early retirement programs and involuntary workforce reductions involving approximately 1,100 positions, of which 650 were in the U S

At December 31, 1995 the remaining liabilities associated with the 1994 restructuring program amounted to $21.4 million, of which $9 million is included in current liabilities in the Company's 1995 consolidated balance sheet. The remaining long-term liabilities will be paid out in the form of annuity payments for certain early retirees as well as lease payncnts through the year 2020.

Othev Income and Expenses Investment Income Investment income earned on operating h n d s increased by $8.3 million, or 76.1 percent, in 1995 compared to an increase of $1.3 millinn, or 13.5 percent in 1994. Contributing to the 1995 increase were higher averagc operating cash and investment levels during 1995 primarily resulting from the Company's improved operating performance and the proceeds from the July 1994 Issuance of the Com- pany's 8% Series R cumulative convertible preferred stuck coupled with slightly higher worldwide interest rates. In 1994 the increase was primarily attributable to interest mcomc earned on the proceeds from the aforementioned July 1994 preferred stock issuance.

Intevest Expense Interest expense increased by $2.6 million, or 16.3 percent, in 1995 compared to an increase of $1.6 million, or 11.1 percent, in 1994. The 1995 increase is due to a higher averagc debt level result- ing from the $50 million borrowing in mid-1994 relating t o a contract with a reinsurance company and the issuance of long-term nrmx payable upon settlement of the Shand Morahan & Company (Shand) and Mutual Fire, Marine & Inland Insurance Company (Mutual Fire) contingmcies during the tirst quarter of 1995. The 1994 increase is due primarily to a higher debt level associated with thc aforcmcntioned $50 million borrowing.

Other Other income (expenses) consists of the following:

For rhc Years h d c d lkcrmbcr 31, 1995 1994 1993 Gains on sales of husincsscs $30.4 520.2 5 3<1 Litigation cosrs (0.1) (9.1) (20.2)

During 1995 and 1994, as part of its efforts to streamline its operations and concentrate on its core businesses, the Company disposed of certain opcra- tions. O n February 28, 1995, the Company c o n pleted the sale of Alexsis Inc., its US-based third party claims administrator, for total cash proceeds of $47.1 million resulting in a pre-tax gain of $28.7 million ($18.7 million after-tax or $0.42 per share).

During 1995, the Company sold three small operations for gross proceeds of $9.1 million resulting in pre-tax gains totaling $1.7 million ($1.1 million after-tax or $0.02 per share).

O n November 10, 1994, the Company ct~mpleted the sale of its US-based personal lines insurance broking business. The total proceeds from the sale were $30.2 million with a resulting pre- tax gain of $20.2 million ($12.5 million after-tax or $0.28 per share).

During 1993, the Company sold three small operations for gross proceeds of $9.6 million. Pre-tax gains of $3.9 million were recognized on the sales with resulting after-tax gains totaling $2.3 million or $0.05 per share.

Litigation costs are associated primarily with the Mutual Fire lawsuit described in Note 1 4 of Notes to Financial Statements as well as a 1993 settlement of certain other litigation matters.

Special Chacqes I11 the fourth quarter of 1994, the Company recorded pre-tax special charges of $69.7 million ($45.3 million after-tax or $1.03 per share). These charges, which were reflected in non-operating results, included a S32.5 million settlement in January 1995 which resolved certain indemnification obligations relating to the 1987 sale of Shand and a $37.2 million increase to the Company's prc- existing reserves. The latter was based on settlement discussions which led to a March 1995 settlement agreement, subsequently approved by the courts, relating to lawsuits and other disputes brought against the Co~npany and others by the rehabilirator of Mutual Fire. The resolution of these contingen- cies reflected management's view that negotiated settlements would he more cost-effective than protracted litigation. For further information relating t o these matters, see Note 14 of Notes to Financial Statements.

Income Taxes The Company's efkctive tax rates were 39 percent, 29 percent and 20 percent in 1995, 1994 and 1993, respectively. These rates compare to the U S . statu- tory rate of 35 percent. The effective rates were negatively impacted by certain expenses, including

enter ta inment costs and amor t i za t i on or goodwi l l , is cur rent ly under examinat ion b y the IRS for w h i c h were not deduct ib le in certain jur isdict ions in years 1990 and 1991. I t is not expected tha t t he w h i c h t h e C o m p a n y conducts business. Offsetting examinat ion will have any ef fect on real izat ion of these factors were foreign tax rates l o w e r t h a n the the 1 9 9 4 carryforward. US. sta tu tory rate and state a n d local tax benef i ts At December 31, 1995, t he C o m p a n y has a n e t on losses generated in the U S . operat ions in 1 9 9 4 dcferred tax asset balance of $97.1 million w h i c h is a n d 1993. compr ised of n e t defer red tax assets in the US. of

T h e Company's 1 9 9 3 effective tax rate was $1 18.6 million offset b y n e t deferred tax l iabi l i t ies favorably impacted b y the recogn i t i on of a $3.5 of $21.5 million outs ide t h e US. T h e deferred tax million tax benef i t associated w i t h a prior year capital asset is n e t of a $35.2 million valuat ion al lowance loss. T h e rate was also favorably af fected b y the p r imar i l y re la t ing to fore ign and US. state n e t oper - results of Clay & Partners, a U.K.-based actuarial a t i n g loss a n d capital loss carryforwards. T h e valua- consu l t ing operat ion acquired in 1 9 9 3 in a pooling tion allowance represents approximately 8 5 percent of interests transaction. P r io r to the merger, C lay of these carryf imvards. At th is t i m e the C o m p a n y operated as a partnership a n d accordingly, i ts results believes tha t it is m o r e l ikely t han not t h a t th is p o r - did not ret lect corporate i ncome taxes o f approx i - tion of these deferred tax assets will not be realized. mately $1.9 n~illion. T h e va luat ion allowance decreased in 1 9 9 5 b y a

T h e C o m p a n y files a consol idated U S . federal n e t a m o u n t of $1.5 million, pr incipal ly d u e to the i ncome tax r e t u r n w h i c h includes the losses of i ts u t i l i za t i on fix tax purposes of fore ign capi tal loss US. discont inued operat ions. A reconc i l ia t ion of carryrorwards, of fset b y increases in fore ign and US. t he book to taxable i ncome (loss) for t h e Company's state n e t operat ing losses. US. operat ions is as follo\vs: A substantial portion of the n e t deferred tax

asset d a t e s to various financial statement expenses For rhc Ycars Ended December 31, 1995

- 9 1993 and accruals, pr imar i ly in the US., tha t will not b e Inrorne (lorn) betbrc r ~ r c s S 37.4 S(200.9) S(74.2) tax deduct ib le until paid. These costs, w h i c h w i l l b e

Anlorrimtion of p rx i v4 l 4.4 4.2 4 8 pa id in future years, pr incipal ly inc lude res t ruc tu r i ng I>cprcciation 1.0 6.6 5.4 costs, defer red compensat ion expenses, professional Tar lcascs 8.3 7.0 7.6 i ndemn i t y costs, and pension and o t h e r employee Ikposirions of subsidiaries/ benef i t expenses. T h e n e t defcr red tax asset also

businerscs 27.8 (19.2) (8.5) includes $15.8 million re la t ing to the $ 4 5 m i l l i o n (imringcnc? scrrlcrncnrr (83.9) 69.7 - carry forward o f the 1 9 9 4 US. taxable loss w h i c h Iksrrucruring expenses (11.4) 25.8 (2.9) will expire i n t he year 2009, US. federal fo re ign tax Rcpnrriarion dtbrcign cnming 0.9 9.3 131.0 credi ts t o ta l i ng $1 1.8 million w h i c h expire in years Othcr, including accruals 1 9 9 8 through 2000, and US. federal alternative

not currently dcducrihlc (4.4) 18.9 39.9 minimum tax credi ts of $7.5 million w h i c h can he Tanhle income (loss) carr ied forward indefinitely. T h e C o m p a n y expects

from continuing opcntions (19.9) (78.6) 103.1 tha t suff ic ient taxable i ncome will b e generated in

Tar;lhle income (loss) from f i l ture years to realize these carryforwards, a n d disconrinucd opcrrrions (5.4) (4.8) 4.6 therefore, t he C o m p a n y believes a valuat ion

U S . raxnhlr incomc (loss) S(25.3) $ (83.4) 5107.7 allowance is not necessary fix these amounts. A l t h o u g h fu ture earnings canno t be pred ic ted

T h e C o m p a n y recorded a n $8.8 million benefit with certainty, management cur rent ly believes t h a t w i t h regard to the 1 9 9 5 US. taxable loss, w h i c h will real izat ion of the n e t defer red tax asset is m o r e l i ke ly be carr ied back. T h e C o m p a n y carr ied back $38.4 than not. T h e n e t US. deferred tax asset w o u l d be m i l l i on of the 1 9 9 4 US. taxable loss, a n d received a realized w i t h average f i ~ t u r e annual earnings equiva- tentative re fund of federal i ncome tax in the a m o u n t l en t to 1 9 9 5 results exc lud ing non - recu r r i ng i tems of $16.3 million in February 1996 . T h e a m o u n t a n d so ld subsidiaries and businesses. carried back relates pr imar i ly to the deduct ions A s discussed in N o t e 5 of N o t e s to Financial c laimed for interest i ncu r red in connec t i on w i t h the Statements, t he C o m p a n y was advised during 1 9 9 4 settlement of the examinat ion b y t h e In te rna l Rev- t ha t t he Toint C o m m i t t e e on Taxat ion h a d approved enue Service (IRS) of years 1 9 8 7 through 1 9 8 9 and the agreement reached in 1 9 9 3 b y the C o m p a n y and for payments on various cont ingency settlements. t he Appeals O f t i ce of the IRS on sett lement of tax T h e remain ing 1 9 9 4 US. taxable loss, $45 million, issues w i t h respect to years 1 9 8 0 t h r o u g h 1986. w i l l be carried forward. As discussed in N o t e 5 A lso during 1994, t he C o m p a n y reached an agree- of N o t e s to Financial Statements, t he C o m p a n y m e n t w i t h t h e I R S on sett lement o f the examinat ion

of years 1 9 8 7 through 1989. On February 28, 1995, t he C o m p a n y pa id the amoun ts d u e for such

seventeen

years and charged the tax and net interest totaling $35.6 million against previously established reserves.

In 1994, the Company received a Notice of Proposed Adjustment from the IRS in connection with the examination of its 1990 and 1991 federal income tax returns, proposing an increase in taxable income for the 1991 year which, if sustained, would result in additional tax liability estimated by the Company at $50 million, excluding interest and penalties. This proposed adjustment relates to inter- company transactions involving the stock of a United Kingdom subsidiary.

The Company disagrees with the proposed adjustment and has requested advice from the IRS National Office o n this issue. The Company cur- rently believes that the National Office review should be completed in the first half of 1996. Al- though the ultimate outcome of the matter cannot be predicted with certainty, the Company and its independent tax counsel believe there are substantial arguments in support of the Company's position and that the Company should prevail in the event that the issue was to be litigated.

A similar set of transactions occurred in 1993. Depending on the outcome of the IRS National Office review of the 1991 issue, the IRS could propose an increase in 1993 taxable income which would result in an additional tax liability estimated by the Company at $25 million, excluding interest and penalties. The Company's 1993 tax return is not currently under examination. The Company believes it should prevail in the event this similar issue is raised by the IRS. Accordingly, no provision for any liability with respect to the 1991 and 1993 transactions has been made in the consolidated financial statements.

The Company believes that its current tax reserves are adequate to cover its tax liabilities.

Discontinued Operations In 1985, the Company discontinued its insurance underwriting operations. In 1987, the Company sold Sphere Drake Insurance Group (Sphere Drake). The Sphere Drake sales agreement provides indem- nities by the Company to the purchaser for various potential liabilities including provisions covering future losses on certain insurance pooling arrange- ments from 1953 to 1967 between Sphere Drake and Orion Insurance Company (Orion), a U.K.. based insurance company, and future losses pursuant to a stop-loss reinsurance contract between Sphere Drake and Lloyd's Syndicate 701 (Syndicate 701). In addition, the sales agreement requires the Company to assume any losses in respect of actions or omissions by Swann & Everett Underwriting

Agency (Swann & Everett), an underwriting man agement company previously managed by Alexander Howden Group Limited (Alexander Howden).

In 1994, Orion, which has financial respon- sibility for sharing certain of the insurance pool liabilities, was placed in provisional liquidation by order of the English courts. Based on current facts and circumstances, the Company believes that the provisional liquidation will not have a material adverse effect o n the net liabilities of discontinued operations.

The net liabilities of discontinued operations shown in the accompanying Consolidated Balance Sheets include insurance liabilities associated with the above indemnities, liabilities of insurance under- writing subsidiaries currently in run-off and other related liabilities.

The insurance liabilities represent estimates of future claims expected to be made under occur- rence based insurance policies and reinsurance busi- ness written through Lloyd's and the London market covering primarily asbestosis, environmental pollution, and latent disease risks in the United States, which are coupled with substantial litigation expenses. These claims are expected to develop and be settled over the next nventy to thirty years.

Liabilities stemming from these claims cannot be estimated using conventional actuarial reserving techniques because the available historical experience is not adequate to support the use of such tech- niques and because case law, as well as scientific stan- dards for measuring the adequacy of site cleanup (both of which have had, and will continue t o have, a significant bearing on the ultimate extent of the liabilities) is still evolving. Accordingly, the Company's independent actuaries have combined available exposure information with other relevant industry data and have used various projection tech- niques t o estimate the insurance liabilities, consisting principally of incurred but not reported losses.

O n July 1, 1994, the Company entered into a finite risk conmct with a reinsurance company, pro- viding protection primarily for exposures relating to

Orion, Syndicate 701 and Swann & Everett. The contract provided for a payment by the Company o f$80 million, $50 million of which was borrowed from the reinsurance company, and for payment by the Company of the first $7.7 million of paid claims. The contract entitles the Company to recover paid claims in excess of the Company's $73 million reten- tion. At December 31, 1995, the recoveries were limited t o $1 15.2 million, which includes the Company's payment of $80 million. In addition, commencing December 31, 1996, depending on the timing and amount of paid loss recoveries under the contract, the Company may be entitled t o receive a payment from the reinsurance company in excess of

the amounts recovered for paid losses if the contract is terminated. The contract is accounted h r under the deposit method of accounting and the account- ing requirements for discontinued operations. As a result of this transaction, the Company recorded a $6 niillion charge in the second quarter of 1994 \\'hicIi rcprcscnted the cost of the premium and

deductible that exceeded existing reserves tbr cov- ered exposures at that time.

l h r i n g the third quarter of 1994, the Company recorded a $20.9 million charge rrlating t o an agreement that resolved certain indemnity ohlign- tions to Sphere Drake. Under terliis of the Sphere Drake agreement, the Company received a cash payment of $5 million in settlement of the zero coupon notes receivable nnd related indemnities as \\,ell as certain incomc tax liabilities.

While the insurance liabilities represent the Company's best estimate of the probable liabilities within a rangc of independent actuarial estimates of reax)n.ihly prohablc loss amounts, there is no assur- ance that further adverse dc\dopment may not occur due to variables inherent in the estimation processes and other matters dcscrihcd above. Based on independent actuarial estimates of a rangc of reasonably possible loss amounts, liabilities could exceed recorded amounts by apprnximately $170 niillion. Howcvcr, in the went of such adverse dc\dopmcnt, hased on tlie independent actuarial estimate of pay out patterns, up to approxiniately $130 million of this excess would be recoverable under tlie finite risk contracts.

The Company hclicvcs that, bascd on current estimates, the established total net liabilities of discontinued operations arc sufticient to cover its exposures.

Cumulative Effect Adjustments Effcctive January 1, 1994, the Company adupted SFAS NII. 112, "Employers' Accounting h r Postcmplogmcnt Benefits." This statement requires that certain benetits provided t o h rmer or in- active employees after eniplnymcnt but prior to retirement, including disability benefits and health care continuation coverage, be accrued bascd upon the miployees' service already rendcrcd. The cumu- lative effect of this accounting change \\,as an aftcr- tax charge of $2.6 million or $0.06 per share in the first quarter of 1994. The increase t o the annual cost of providing such benefits will not be signiticant.

Effcctive January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of adopting this stan- dard increased net income in the tirst quarter of 1993 by $3.3 million or $0.08 per share. Tax hcne-

fils of $3.2 niillion wcrc also allocated to paid-in capital representing the difference in the tax hascs over the hook bases of the net assets of taxable husi- ness combinations accounted tbr as pooling of intcr- ests. These benefits would have been rccognizcd at the respective dates of combination if SFAS No. 109 had been applied at that time.

Segment Information Insurance Services Operating results for the Insurance Services segment of the Company's opcratlons arc summarized belo\\-:

~ ~ c s ~ ~ ~ ~ c ~ c I ~ ~ ~ I ~ / S ~ ~ ~ ~ ~ ~ I charscs 15.7 56.3 -

l ixr l c,prmring cxpcc~rcr 928.4 1.1264 1,0357

Opemting incomc 5 143.4 S (12.2) F 92.9

Risk Mnnn-qcmrut nnd Insurnnc~ Services R~okin~q Revenues Worldwide risk management and insurance s c r \ k s broking commissions and fecs were $739.8, \vhich decreased $76.6 million, or 9.4 percent, in 1995 cornpard to a $16.3 million, o r 2 percent, decrease in 1994. Reflected in the 1995 decrease are the net impact of sold operations which reduced re\.- cnucs by $106.5 million, a favorable tbreign ex^

change rate variancc of $4.9 million and an increase in reveliucs nf $1 1.2 million rclating to tlic k)urtli quarter JIB acquisition.

Excluding tlic effect of tlicsc itcnis, 1995 commissions and fecs increasd $13.8 niillion, or 2 percent.

In 1995, the Continental Europc, Latin America, and Asia-Pacific opcrations reported incrcascd coni- missions and fces of $1.4 niillion, $7 million and $5.1 million, rcspecti\dy. The European opcrations favorable variance rctlccts incrrascd commissions and fces, particularly in Germany, the Netherlands and France, partially ofkct by a decrease k x such rc \ rcn~~es in the U.K. The Continental Eurnpc increases arc primarily attributable to increased commission rates and tlic acquisition of a sniall brokerage business. The U.K. decrease reflects weakened pricing resulting from a softening insurance market. The increases in the Latin American operations are primarily due to new

ntneteen

business production and favorable client retention Icvels. The increase in the Asia-Pacific operations retlects the acquisition of a small brokerage business.

Rroking revenues in the U.S. decreased by $29.7 million in 1994 compared to 1993 retlccting the continued softness in certain insurance markets and lost business. Partially offsetting the U S . decline were revenue increases for certain of the Company's international risk management and insur- ance services operations. Particularly, there was an increase of $13.2 million in the Latin American operations, primarily from the 1993 Mexico acquisi- tion, and also increases of $5.3 million and $3.7 million in the European and Canadian operations, respcctivcly. These increases were due primarily to new business production. Furthermore, sold opera- tions served to reduce 1994 broking revenues by $8.4 million and changes in foreign currency rates negatively impacted such revenues by $1 million.

Specialist Insurance and Reinsurance Rrokin8 Re~,enues To achieve operational efficiencies, in late 1994 the specialist insurance broking and reinsurance broking operations committed to merge their operations into one business unit, headquartered in London cffec- tivc Tanuary 1, 1995. Prior to thc merger, they oper- ated as independent business units.

Total 1995 bn~k ing commissi~~ns and fees of $269.4 million increased $24 million, or 9.8 pcr- cent, versus 1994 levels. This compares to an increase of $3.1 million, or 1.3 percent, in 1994. These increases were primarily due to reported new business increases of $22.2 million and $3.2 million in the U.S. and overseas operations, respectively.

In 1994, selected premium revenues and new business in the Company's international opera- tions, particularly in Canada, Francc, Asia-Pacific and Latin America were substantially oftiet by a decline in thc U S .

The Company enters into hrcign exchangc h r - ward contracts and foreign exchange option agree- ments primarily t o provide risk management against future exposures that arise at its London-based spe- cialist insurance and reinsurance broking operations. The exposures arise because a significant portion of the revenues of these operations are denominated in U S . dollars, while their expenses are primarily denominated in U.K. pounds sterling. In the event the U S . dollar's value was t r ~ change by $0.10 per U.K. pound sterling, the annual operating income and cash tlow of the specialist and reinsurancc broking operation would change by approximately $4 million.

The fair market value of hreign exchangc con- tracts is impacted by changes in the spot foreign exchange rate. At December 31, 1995, the fair mar- kct value of all foreign exchange hedging instru- ments was a liability of $0.7 million. If the dollar appreciated by $0.10 against the U.K. pound ster- ling, the fair value of these h e i g n exchangc instru- ments would be a liability of $4.7 million. If the dollar depreciated by $0.10, the fair value would be an asset of $2.5 million.

Foreign exchangc contracts are marked to mar- ket at each balance sheet date and are included in other current assets or liabilities, with the resulting gain or loss recorded as a component of other opcr- ating expenses. If these contracts had been t e rm- nated at December 31, 1995 and December 31, 1994, the results would have been a liability of $0.7 million and an asset of $2.6 million, respcc- tively. For additional inhrmation relating to the Company's foreign cxchange financial instruments, see Note 12 of Notes to Financial Statemmts.

These foreign exchange contracts are purchased from large international banks and financial institu- tions with strong credit ratings. Credit limits arc established based upon the credit ratings of such institutions and arc monitored rrn a regular basis. Management does not anticipate incurring any losses due t o non-performance by these institutions. In addition, the Company monitors the market risk associated with foreign exchange and options con- tracts by using probability analysis, external pricing systems and information from banks and brokers.

Fiduciavy Investment Income l h r i n g 1995, investnicnt income earned on fidu- ciary fi~nds, increased by $1 1.2 million, or 21.8 percent, versus 1994 levels. The increase was primarily due to higher worldwide interest rates, particularly in the U.S. and U.K.

Investment income earned on fiduciary fitnds decreased by $2.2 million in 1994 primarily due to lower average invcstnient levels, particularly in the U.S.

0pwatin.g Expenses Operating cxpenses were $928.4 millkln in 1995. Excluding a $15.7 million special charge in 1995 primarily associated with the JIB acquisition and $40.2 million of restructuring charges in 1994, worldwide, risk management and insurance services optrating expenses decreased by $154.3 million, or 18.5 percent, in 1995 compared to an increase of $14.6 million, or 1.8 percent, in 1994. The effect of changes in foreign currency ratcs increased rxpensrs by $2.1 million and $6 million in 1995 and 1994, respectively. The fourth quarter JIB acquisition increased expenses $1 1.2 million in 1995. Retlected

in the 1995 decrease is a reduction of expenses of approximately $102.8 million due to the sale of non-core businesses.

After adjusting for the effects of changes in for- eign currency rates and acquisitions and dispositions, total 1995 operating expenses decreased $64.8 million, or 8.9 percent, on a comparable basis.

The U S . and European operations reported decreased operating expenses of $67 million and $2.1 million, respectively. The U S . favorable opera- tions variance primarily reflects the implementation of the 1994 plan of restructuring and other expense initiatives, including tightening of travel and enter- tainment practices, elimination of certain employee perquisites and the consolidation of vendor and supply management. In addition, 1994 expenses included $24.9 million of additional reserves relating to the settlement of certain large litigation matters and reserve strengthening. The European operations favorable variance reflects reduced operating expm- ses in the U.K. substantially offset by increased oper- ating expenses in Continental Europe. Furthermore, increased operating expenses of $3.9 million and $3.4 million were reported in the Asia-Pacific and Latin American operations, respectively. The reported reduc~ions were primarily the result of the aforementioned restructuring and other expense ini- tiatives undertaken in 1994 somewhat offset by an increase in incentives attributable to improved sales and profit performance coupled with the implemen- tation of several new long-term incentive compensa- tion plans. The reported increase in the Asia-Pacific operations was primarily due to an acquisition of a small brokerage business.

Contributing t o the 1994 increase were higher insurance costs and increased operating expenses of $13 million in the Latin American operations, primarily due to the 1993 Mexico acquisition, some- what offset by a decline in expenses of $15.2 million for operarions sold in 1994 and 1993.

Operating expenses, excluding $16.1 million of 1994 restructuring charges, for the specialist insur- ance and reinsurance broking operations decreased by $2.1 million, or 0.9 percent, in 1995 compared to an increase of $18.8 million, or 8.8 percent, in 1994. Foreign exchange rate variances, including hedging contracts gains and losses, negatively im- pacted 1995 expenses by $5.3 million and had a minimal impact on 1994 expenses.

Excluding the impact of foreign exchange rate variances, total operating expenses decreased by $7.4 million, or 3.2 percent, in 1995.

Contributing to the 1995 decrease were lower expenses of $18.4 million in the U.K. operarions partially offset by higher expenses of $5.6 million in

the U S . operarions. The reported reduction in the U.K. operations was primarily the result of the afore- mentioned restructuring and other expense initia- tives undertaken in 1994. Both of these variances reflect additional incentives during 1995 due to improved operating performance.

A signiticant portion of the 1994 operating expense increase was due to certain additional incen- tive and benefit expenses in the U.K. operations arising from amendments to existing incentive plans and payments required to its employees as a result of modification of employment terms.

Human Resouvce Management Consnltif8.q Operating results for the Human Resource Manage- ment Consulting segment of the Company's opera- tions are summarized below:

For fhc Years Endcd Ikccmher 31, 1995 1994 - - -

I993 ~- p~ - -- -

Operaring revenues:

C~,mmissions and fccs 5210.3 S210.5 $212.7

Fiduciary invesrmcnr incomc 0.3 0.2 0.3

Total operating rcvcnurr 210.6 210.7 213.0

Opcraring crpcnscs:

Operaring cxpcnser 199.2 221.5 220.5

Rcsrrucru~ing/Spccial chargcr 1.4 8.3 -

'Toral operating cxpcnscr 2110.6 229.8 220.5

Opcaring inconnc (loss) S 10.0 S(19.1) S (7.5)

Human resource management consulting com- missions and fees of $210.3 million decreased by $0.2 million, or 0.1 percent, in 1995 compared to

a decrease of $2.2 million, or 1 percent in 1994. After adjusting for the effects of changes in foreign exchange rates, these revenues decreased by $2.1 million, or 1 percent, and by $2.8 million, or 1.3 percent, in 1995 and 1994, respectively.

The 1995 decrease is primarily attributable to revenue shortfalls in the U S . operations partially offset by increases in the Canadian operations. Con- tributing t o the 1994 decrease was a shortfall in the U.K. operations primarily due to the enactment of legislation requiring commission disclosure to clients on financial services products.

Operating expenses, excluding $1.4 million of special charges in 1995 and $8.3 million of 1994 restructuring charges, decreased by $22.3 million, or 10.1 percent, in 1995 compared to an increase of $1 million, or 0.5 percent, in 1994.

After adjusting for the effect of changes in foreign exchange rates, operating expenses decreased by $24.2 million, or 10.9 percent, in 1995 com- pared to an increase of $0.8 million, or 0.4 percent, in 1994.

Reflected in the 1995 decrease were reductions of $18 million, $4.2 million and $2.4 million in the operating expenses of the US. , U.K., and Canadian

operations, respectively, primarily a result of the aforementioned restructuring and other expense ini- tiatives undertaken in 1994. Contributing to the 1994 increase were higher salary costs in the U.K. from the Clay acquisition, which operated as a part- nership in 1993, partially offset by decreases in the total operating expenses of the U S . operations due primarily to one-time expenses reflected in their 1993 results.

Liouiditv and Capital Resources At December 31, 1995, the Company's operating cash and cash equivalents totaled $241.2 million, a $7.5 million decrease over the 1994 year-end bal- ance. In addition, the Company had $42.2 million of operating funds invested in short-term and long- term investments at December 31, 1995, a $41.1 million decrease compared t o December 31, 1994.

Operatin8 Activities The Company's funds from operating activities con- sist primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred income taxes, and gains on sales of busi- ness. The net cash flows relating to discontinued operations and changes in worlung capital balances are also included, as well as, certain items such as 1995 special charges and 1994 restructure and special charges. In 1995, the Company's operating activities used $10.3 million ofoperating funds, including the items described below.

The 1994 charges for restructuring required $26.4 million of cash payments during 1995. The Company anticipates that approximately $9 million will be funded during 1996.

As described in Note 5 of Notes to Financial Statements, in February 1995, the Company paid to the IRS the amount due in settlement of the exami- nations of the years 1980 through 1989. Tax and net interest totaling $35.6 million was charged against previously established reserves.

During the first quarter of 1995, the Company made a cash payment of $14 million under the terms of the settlement relating t o Shand. A $12 million cash payment was made on April 1, 1995, in accor- dance with the Mutual Fire settlement agreement. These payments were applied against the 1994 spe- cial charges reserve and the Company's previously established reserves.

During the first quarter of 1995, the Company made cash payments of approximately $21.8 million relating to the settlement of certain large litigation matters. These payments were applied against the Company's previously established reserves.

Investing Activities The Company's net capital expenditures for property and equipment and acquisitions were $52.1 million and $26.2 million during 1995 and 1994, respectively. These expenditures increased primarily as a result of the Company's fourth quarter JIB acquisition.

In January 1995, the Company received the remaining proceeds of $29.2 million from the November 1994 sale of the US-based personal lines business. In addition, the Company received $7.2 million in January 1995 from the sale of its minority interest in a U.K. merchant bank and $47.1 million in February 1995 from the sale of Alexsis Inc.

O n October 12, 1995, the Company acquired most of the U S . retail insurance broking and con- sulting business of JIB for a purchase price not t o exceed $48.3 million. The Company paid $21.1 million at closing and issued two 6.375% promissory notes totaling $21.2 million with payments of $10.6 million due on April 9 and October 12, 1996, respectively. During the fourth quarter of 1995, the October promissory note was revalued t o $8.1 million as a result of certain revenue retention crite- ria with respect to former JIB offices. The remaining purchase price of approximately $6 million is contin- gent on the retention of specific accounts over a four-year period ending October 12, 1999. The acquired offices generated revenues of approximately $53 million in 1994.

The acquisition was accounted for as a purchase. Of the purchase price, $44.3 million has been alloca- ted to identifiable intangible assets (expiration lists) and goodwill. In completing its integration plans, the Company incurred a one-time charge of $13 million in the fourth quarter relating to the closing of certain of its offices and workforce reductions.

Financin8 Activities During the first quarter of 1995, the Company increased long-term debt by $19.8 million and re- corded a note receivable of $1.3 million under the terms of the settlement relating to Shand. In the second quarter of 1995, $15.8 million of t h ~ s long- term debt was prepaid and $1.3 million of cash was received in payment of the note receivable. The remaining contingent note payable of $4 million was paid in full in September 1995.

As a rrsult of the Mutual Fire settlement, the Company issued a $35 million zero coupon note in March 1995, payable in six annual installments. Using a discount rate of 9.3%, the present value of the note was recorded as a $25.9 million long- term debt obligation. The present value of the out- standing principal balance of the note payable was $27.5 million at December 31, 1995.

The decline in cash dividend payments reflects the reduction in the Company's Common Stock

dividend by 9 0 percent in the second quarter of 1994, resulting in annualized cash flow improve- ment of $40 million. The 1995 cash flow improve- ment from this action was approximately $10 million compared t o 1994. In addition, dividends on the Company's Series B Cumulative Colivertible Pre- fcrrcd Shares (Series B Convertible Preferred Shares) are payable in kind (additional Series R Convertible Preferred Shares) until December 15, 1996, and thereafter, at the discretion of the Board of Direc- tors, until December 15, 1999.

Under the terms of the Series R convertible pre- ferred stock purchase agreement (AIG Agreement) the declaration or payment of dividends on Com- mon Stock in excess of prescribed amounts may require the Company to purchase all or part of the then outstanding Series B Convertible Preferred Shares. Dividends o n the Series B Convertible Pre- ferred Shares reduced the amount of earnings other- wise available for common stockholders by approxi- mately $17 million in tlic tirst year after issuance, and will reduce earnings by approximately $23 million in the fifth year after issuance, assuming dividends on the Series B Convertible Preferred Shares were to be paid in kind throughout tlic first five years after issuance.

On March 27, 1995, the Company's then cxisting credit agreement was replaced by a new $200 million three-year facility with various banks which cxpircs in March 1998. The agreement provides h r unsecured borrowings and for the issuance of up to $100 million of letters of credit. During the second quarter of 1995, the Company arranged a $10 million letter of credit under this agreement. On October 13, 1995, the Company redecmed all $60.2 million of its outstand- ing 11% Convertible Suhordinated Lkbcntures, due 2007, together with accrued interest and a $0.9 mil- lion redemption premium. This redemption was pri- marily funded by the Company through the borrow- ing of $60 million under its revolving credit facility. In Decembcr 1995, tlie Company repaid $30 million of its revolving credit facility borrowings. The interest rate on the remaining $30 million was 6.3125% as of December 31, 1995. The Company borrowed $10 million under this agreement in January 1996 and an additional $20 million in February 1996. See Note 8 of Notes to Financial Statements h r further information regarding this crcdit agreement.

Supplementing the credit agreement, the Corn- pany has unsecured lines of credit available for gen- era1 corporate purposes totaling $87.9 million, of which $87.8 million were unused at l k e m b e r 31, 1995. These lines consist of uncommitted cancellable facilities in foreign countries. If drawn, the lines bear interest at market rates and carry annual fees of not greater than 1/2 percent of the line.

In March 1995, a U S . subsidiary prcpaid an unsecurcd $10 million tcmm loan which was due August 1995.

Other As a result of the devaluation of the Mexican peso in late 1994, the Company's accumulated translation adjustment balance for its Mexican operations rctlectcd an unrealized loss of $6.2 million at December 31, 1994. Further devaluation of the Mexican peso during 1995 has increased this unreal- ized loss to $9.5 million at December 31, 1995. However, the Company expects to maintain its strategic investment in Mexico h r the long term and further anticipates that its Mexican operation will remain profitahlc. Accordingly, the Company does not consider its investment in Mexico to be impaired.

In 1995, the Accumulated Translation Adjust- ments, which represent the cumulative effect of translating the Company's international operations to U.S. dollars, negatively impacted total Stock- holders' Equity by an additional $2.9 million. The decrease primarily reflects the weakening of the U.K. pound against thc U S . dollar despite the strcngth- ening of most of the other major European curren- cies and the Canadian dollar against thr 1J.S. dollar.

At December 31, 1995, the Company had an accumulated deficit of $227.5 million. The Company's current financial position satisfies Maryland law requirements for the payment ofdivi- dends. At December 31, 1995, the current mari- mum amount of unrestricted funds the Company has available to pay Common Stock dividends under Maryland law equaled approxiniately $287.6 million. The Board of Directors will continue t o take into consideration the Company's tinancial performance and projections, as well as the provisions of tlie AIG Agreement pertaining to dividends described in Note 1 0 of Notes to Financial Statements, in con- nection with t i~ture decisions with respect t o divi- dend declarations. In addition, no dividends may hc declared or paid on the Company's Common Stock unless an equivalent amount per share is declared and paid on the dividc'nd-paying shares associated with the Class A and Class C Cr)mmon Stock.

As described in Notes 6 and 14 of Notes to

Financial Statements, tlie Company believes its most significant litigation matters and other contingencies have been settled.

The Company believes that cash flow from operations, along with current cash balances, will be sufficient to fund working capital as well as all other obligations on a timely basis. In the event additional funds are required, the Companv believes it will have sufficient resources, including borrowing capacity, t o meet such requirements.

Report of Management

The Company's management is responsible for the preparation and contents of the informa- tion and representations contained in the consoli- dated financial statements and other sections of this Annual Report. Management believes that the consolidated financial statements and related information have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances, including amounts that arc based on management's judgment and best estimatrs.

The Company maintains a system of internal accounting controls to provide reasonable assur- ance that assets are safeguarded against loss from unauthorized use or disposition and that account- ing rccords provide a reliable hasis for the prepara- tion of financial statements. The internal account- ing control system is augmented by an internal auditing program, written policies, including the Integrity Guidelines and the careful selection and training of qualified personnel.

Deloitte & Touche L1.r has been engaged, with the approval of the Company's stockhnlders, as the independent auditors t o audit the financial state- ments of the Company and to express an opinion thereon. Their opinion is based on procedures believed by them t o he sufficient to provide reawn- able assurance that the financial statements present fairly, in all material respects, the Company's finan- cial position, cash tlows and results of operations. Their report is set forth on Page 24. The Audit

Committee of the Board of Directors is compoed of four directors, none of whom is an employee of the Company. It assists the Board in exercising its fiduciary responsibilities for oversight of audit and related matters, including corporate accounting, reporting and control practices. I t is responsible for recommending to the Board of Directors the indc- pendent auditors to be employed for the coming year. The Audit Committee meets periodically with management, internal auditors and the independent auditors to rcvicw internal accounting controls, auditing and financial reporting matters. The inde- pendent audinxs and the internal auditors have unrestricted access to the Audit Committee.

Frank G. Zarb Chairman of the Roard, Pvesidrnt 0 Chref Evecntive Officer

Edward F. Knsnik Senior Executive Vice President r" Chief Financial Qfficer

Independent Auditors' Report

To The Stockholders of Alexander & Alexander Services Inc.:

We have audited the accompanying consolidated balance sheets of Alexander & Alexander Services Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with

In our opinion, wch consolidated financial statements present fairly, in all material respects, the financial position of the companies at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.

As discussed in Notes 5, 7 and 11 to the consol- idatcd financial statements, the Company changed its method of accounting for international postretire- ment benefits in 1995, certain investments in debt and equity securities and postemployment benefits in 1994, and income taxes and United States post- retirement benefits in 1993.

generally accepted auditing standards. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate (=,& P ment. An audit includes examining, on a test basis, cvidcncc supporting the amounts and disclosures Deloittc & Touche LLP in the financial statements. An audit also includes Baltimore, Maryland assessing the accounting principles used and signifi- February 14,1996 cant rstirwates made by management, as well as eval- uating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Consolidated Statements of Ooerations

-. 1995 1994

Operating Revenues: Commissions and fees $1,219.5 $1.2723 Fiduciary investment income 62.9 51.6 53.9

--

Total 1,282.4 1,323.9 1,341.6 - ~p

Operating hpenses: Salaries and benefits Other operating expenses Restructuring and special charges Total 1,159.7 Operating income (loss) 122.7

Other Income Ixpenses): Investment income Interest expense Other

Total - 33.3 (63.9) ~- (20.4) Income iloss) before income taxes and , .

minority interest 156.0 (146.8) 31.9 Income taxes (benefit) 60.9 (42.6) 6.4 Income (loss) before minority interest 95.1 (104.2) 25.5 Minority interest (5.7) (3.0) (1.9) Income (loss) from continuing operations 89.4 (107.2) 23.6 Loss from discontinued operations - -

~ ~ (28.9) --

Income (loss) before cumulative effect of change in accounting 89.4 (136.1) 23.6

Cumulative effect of change in accountmg - (2.6) 3.3

Earnings (loss) attributable to - common shareholders $ 64.0 $ (153.8) $ 20.7

Per Share Information: Primary earnings per share: Income (loss) from continuing operations $ 1.44 $ (2.79) S 0.40 Loss from discontinued operations - (0.66) - Cumulative effect of change in accounting - (0.06) 0.08 Net earnings (loss) $ 1.44 $ (3.51) $ 0 . 4 ~

Average common and common equivalent shares outstanding 44.6 43.8 43.4

Fully diluted earnings per share: Income (loss) from continuing operations $ 1.42 5 (2.79) $ 0.40 Loss from discontinued onerations - in 66) -

\ - . - . . I

Cumulative effect of change in accounting - (0.06) 0.08 ~ ~p

Net earnings (loss) $ 1.42 $ (3.51) 5 0.48

Average common and common equivalent shares outstanding, assuming MI dilution 57.1 43.8 43.4

Cash dividends per common share $ . lo $ ,325 $ 1.00 See N o m to Fit~nncial Staremrnir

Consolidated Balance Sheets

-~ - 1995 1994

~~~ ~-

Assets Current Assets: Cash and cash equivalents:

Operating $ 241.2 5 248.7 Fiduciary 496.4 428.5

Short-term investments: Operating 11.3 19.2 Fiduciary 224.9 292.2

Premiums and fees receivable (less allowance for doubtful accounts of $20.5 in 1995 and $23.7 in 1994) 1,292.8 1,206.1

Deferred income taxes 20.0 71.5 Other current assets

- - ---- -- -. 85.4 120.7 Total current assets

~~ - -- . ~- 2,372.0 -~

~p

2,386.9

Property and Equipment: Land and buildings 39.2 39.7 Furniture and e a u i ~ m e n t 274.6 296.5 . . Leasehold improvements

Less accumulated depreciation and amortization (270.4) (293.3) Property and equipment-net 126.4 138.0

Other Assets: Intangible assets (net of accumulated amortization

of $124.5 in 1995 and $117.5 in 1994) 210.7 175.1 Deferred income taxes 102.1 87.1 Long-term operating investments 30.9 64.1 Other . 100.3 94.5 Total assets $2,942.4 52,9457

Consolidated Balance Sheets (continued)

-.

Liabilities a d Stockholders' [pity Current Liabilities: Premiums payable t o insurance companies Short-term debt Current portion of long-term debt Deferred income tares Accrued compensation and related benefits Income taxes payable Other accrued expenses

- - 165.8 258.1

Total current liabilit~es -- 2,120.5 2,149.3 --

Long-term Liahilities: Long-term debt Deferred income taxes Net liabilities of discontinued operations Other 234.1 266.0 -- Total long-term liabilities 409.3 468.9 Commitments and Contingent Liabilities (Notes 5, 6, 13 and 14) 8% Series B cumulative convertible preferred stock contingency (Note 14) 10.0 10.0

Stockholders' byity: Preferred stock, authorized 15,000,000 shares, $1 par value:

Series A junior participating preferred stock, issued and outstanding, none - -

$3.625 Series A convertible preferred stock, issued and outstanding, 2,300,000 shares, liquidation preference of $1 15 million 2.3 2.3

8% Series B cu~nulative convertible preferred stock, issued and outstanding 4,477,170 and 4,136,213 shares, respectively, liquidation preference of $224 million and 5205 million, respectively 4.5 4.1

Common stock, authorized 200,000,000 shares, $1 par value; issued and outstanding 42,259,282 and 41,569,902 shares, respectively 42.3 41.5

Class A common stock, authorizcd 26,000,000 shares, $.00001 par value; issued and outstanding 1,920,821 and 2,282,088 shares, respectively - -

Class C common stock, authorized 11,000,000 sharcs, $1 par value; issued and outstanding 361,092 and 372,557 shares, respectively 0.4 0.4

Class D common stock, authorized 40,000,000 shares, $1 par value; issued and outstanding, none - -

Paid-in capital 638.1 615.0 Accumulated deficit (227.5) (287.1) Unrealized investment gains, net of income taxes 5.6 1.5 Accumulated translation adjustments (63.1) (60.2) Total stockholders' equity -- - - 402.6 317.5 Total liabilities and stockholders' equity $2,942.4 $2,945.7 See Norcr to Financial Sraarnrntr.

Consolidated Statements of Cash Flows

Cash Provided (Used) by: Operating Activities: Income (loss) from continuing operations Adjustments t o reconcile t o net cash provided

(used) by operating activities: Depreciation and amortization Deferred income taxes Gains on disposition of subsidiaries and other assets Restructuring and special charges, net of cash payments Other

Changes in assets and liabilities (net of effects from acquisitions and dispositions): Net fiduciary cash and cash equivalents and

short-term investments Premiums and fees receivable Other current asscts Other assets Premiums payable to insurance companies Othcr accrued expenses Other long-term liabilities

Discontinued operations (net) Cumulative effect .- of change in accounting

Net cash provided (used) by operating activities p~ -

Investing Activities: Net purchases of property and equipment Purchases of businesses Proceeds from sales of subsidiaries and other assets Purcl~ases d o u r r a ~ i n r invcstrr~ents

Consolidated Statements of Cash Flows (continued)

- --

financing Activities: Cash dividends Proceeds from issuance of short-term dcht Payments of short-term debt Proceeds from issuance of long-term deht Payment for a finite risk contract Repayments of long-term debt Issuance of preferred and common stock Distribution of earnings (+oled . cntitv - - -

Net cash provided (used) by financing activities (75.5) 121.2 Effect of exchange rate changes on

operating cash and cash cquivalcnts (1.0) 4.9 Operating cash and cash equivalents at

beginning of year - -- 248.7 -- - ~ - 151.5

Operating cash and cash equivalents - at end of year 5 241.2 $248.7 $151.5

Supplemental Eash flow Information: Cash paid during the yenr for:

Interest 5 19.3 $ 14.2 $ 14.6 Income taxes 72.1 37.0 56.0

-

~ o n l ~ a s h Investing and financing Activities: Notes payable issued for contingency settlements 45.7 - -

Series R cumulative con\,ertiblc preferrcd stock dividends-in-kind 17.1 6.8 -

Common stock issued for business acquisitions and employee benetit and stock plans 5.1 6.8 2.3

Notes reccivcd on dispositions of subsidiaries - 29.2 2.0 Notes payable on acquisition of subsidiary 18.7 - -

Sale of direct financing lease and related mortgage notes - 19.0 -

See N o m in .W~mniinl Smremrnir

Consolidated Statements of Stockholders' Eouitv

1995 1994 - - - 1993

--

$3.625 Series A Convertible Preferred Stork: Balance, beginning of year $ 2.3 $ 2.3 $ -

Shares issued by private placement - - --- 2.3 Ralance, end of year $ 2.3 $ 2.3 $ 2.3

1% Series B Cumulative Convertible Preferred Stock: Balance, beginning of year $ 4.1 S - $ -

Shares issued bv orivate olaccment - 4.0 - , .

Dividends-in-kind 0.4 0.1 - -. ~~ -- ~ p~~~p

Balance, end of year $ 4.5 $ 4.1 $ -

Common Stork: Balnnce, heginning of year $ 41.5 $ 40.7 $ 40.1 Conversions of Class A and Class C shares into common

stock, 372,732 shares, 104,125 shares and 502.450 shares, resnectivelv 0.4 0.1 0.5 . .

Other, principally stock compensation transactions 0.4 0.7 0.1 Balance, end of year $ 42.3 $ 41.5 $ 4 0 3

Class A Eommon Stork: Balance, beginning of year 5 0.0 S 0.0 $ 0.0 Conversions into common stock. 361.267 shares.

87,300 sharcs and 478,892 shares, rcs-cly - ~- - - - -~ . - -

Balance, end of year $ 0.0 $ 0.0 S 0.0

Elass C Common Stock: Ralance, beginning of year $ 0.4 $ 0.4 $ 0.4 Conversions into common stock, 11,465 shares,

16,825 shares and 23,558 shares, respectively - - - Ralance, end of year $ 0.4 $ 0.4 $ 0.4

Paid-in Capital: Balance, beginning of year $615.0 $423.4 S296.5 Conversions into common stock (0.4) (0.1) (0.4) Preferred stock issuances 16.7 188.9 108.6 Other, principally stock compensation transactions 6.8 2.8 1.1 Tax benefit from acquisitions accounted for

as pooling of intere~ts - - - ~

17.6 Ralance, end of year $638.1 $615.0 $423.4

Consolidated Statements of Stockholders' Equity (continued)

Accumulated Oeficit: Balance, beginning of year Net income (loss) Dividends:

Common stock Preferred stock

Distribution of earnings of pooled entity - - (5.5) Balance, end of year $(227.5) $(287.1) 5(119.0)

Unrealized Investment lains, l e t of lnrome Iaxes: Balance, beginning of year $ 1.5 $ - $ - Change in unreali-ns, net of tar 4.1 1.5 -

Balance, end of year $ 5.6 5 1.5 $ -

Acrumulated Translation Adjustments: Balance, beginning of year Foreign currency translation adjustments (2.9) 11.4 (12.6) Balance, end of year $ (63.1) $ (60.2) S (71.6) Sec Nora to Fitlan&l Statrmrntr.

Notes to Financial Statements

I. Siunificant Accountino Policies

Consolidation The accompanying consolidated financial statements of Alexander & Alexander Services Inc. (the Com- pany) include the accounts of all majoritv-owned subsidiaries. All significant intercompan!, transactions and balances have been eliminated.

Nature of Opevations The Company is a holding company which, through its subsidiaries, provides risk management, insurance brokerage and human resource management con- sulting services on a global basis. The principal industrv segment is insurance services. This segment accounted for approximately 84 percent of the Com- pany's total revenues in 1995 which are derived primarily from risk management and insurance ser- vices, specialist and reinsurance broking operations. Human resource management consulting operations, which represent approximately 16 percent of total revenues in 1995, provide integrated advisory and support services in human resource management, i~lcluding retirement planning, health care manage- ment, organizational effectiveness, compensation, human resource-rclated communications, informa- tion technologics and also offcrs brokerage services for group health and welfare coverages.

The Company operates from offices located in more than 80 countries and territories through wholly-owned subsidiaries, affiliates and other servicing capabilities. The Company's extensive international operations rcprcsented 53 percent of conx)lidated operating revcnucs in 1995, primarily in the United Kingdom and Canada.

The Company's clients arc primarily commer- cial enterprises, including a broad range of industrial, transportation, service, financial and other busi- nesses. Clients also include government and go\rer~~mental agencies, not-hr-profit organizations and individuals.

Use of estimates in the pveparation of financial statements The preparation of financial statements in confor- mity with gencrally accepted accounting principles requires management to make cstiniatcs and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the datc of the financial state- ments and the reported amounts of revenues and

cupenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Investments Cash equivalents are highly liquid investments, including certificates of deposit, government secu- rities and time deposits, with maturities of three months or less at the time of purchase and are stated at estimated fair value or cost. Short-term invest- ments are similar investn~ents with maturities of more than three months but less than one year from the date of purchase. Long-term investments con- sists of dcbt securities with maturities greater than one pear and equity srcurities.

Effective January 1, 1994, the Company adopted Statement of Financial Accounting Stan- dards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the statement, the Company has classified as availahle h r sale, all of its dcbt and equity securities. These securities arc carried at fair value with unrealized gains and losses reported as a separate component of Stockholders' Equin. Prior to the adoption of this statement, cash equivalents and short-term investments were stated at cost. The cost of securities sold is determined by the spccitic identification method.

Foreipz Currency Translation The financial statemcnts of the Company's foreign operations, whcre the local currency is the functional currency, arc translatcd into U S . dollars at the ex- change rates in effect at each year end for assets and liabilities and average exchange rates during the year fix the results of operations. The related unrealized gains or losses resulting from trans- lation are reported as a separate component of Stockholders' Equity.

Net foreign currency transaction gains, included in operating income, amounted t o $5.7 million, $4.8 million and $9 nlillion for the years ended Deccmbcr 31, 1995, 1994 and 1993, respectively.

Propevty and Depveciation The cost of property m d equipment is generally depreciated using the straight-line method over the estimated useful lives of the related assets which range from 3 to 40 years for buildings and 3 to 10 years for equipment. Leasehold inlprovements are capitalized and amortized over the shorter of the life of the asset or the lease term.

Intanflible Assets Intangible assets resulting from acquisitions, prin- cipally expiration lists and goodwill, arc amortized using the straight-line method over periods not exceeding 17 and 4 0 years, respectively. The costs of non-compete agreements are amortized using the straight-line mcthod over the terms of the agree- ments. Amortization of intangible assets included in operating expenses amounted to $12.3 million, $11.9 million and $13 million for the years ended December 31, 1995, 1994 and 1993, respectively.

The Company periodically evaluates the carrying value of its intangible assets by projecting operating results over the remaining lives of such assets on an undiscounted basis. Such projections take into account past financial performance as well as man- agement's estimate of future operating results.

Income Taxes Effective January 1 , 1993, the Conipany adopted SFAS No. 109, "Accounting for Income Taxes." The adoption of SFAS No. 109 changes the Com- pany's method of accounting for income taxes from the deferred method to an asset and liability mcthod whereby deferred income taxes reflect the net tax effects of temporary differences between the tax bases and financial reporting bases of assets and liabilities.

Incomc taxes are generally not provided on 1111- distributed earnings of foreign subsidiaries because they are considered to be permanently invested nr will not be repatriated unless any additional federal income taxes would be substantially offset by foreign tax credits.

Fiducia y Funds Premiums which are due from insureds are reported as assets of the Company and as corresponding lia- bilities, net of comniissions, t o the insurance carriers. Premiums received from insureds but not yet remit- ted to the carriers are held as cash or investments in a fiduciary capacity.

Revenue Reco.nition Commissions and fees for insurance services are generally recognized on the effective date of the policies or the billing date, whichever is later. Any subsequent commission adjustments, including policy cancellations, are generally recognized upon notification from the insurance carriers. Contingent commissions and commissions o n policies billed and collected directly by insurance carriers are recog- nized when received.

Fees and commissions for human resource man- agcment consulting services are generally recognized when the services are provided.

Per Shave Data Primary earnings per share are computed by divid- ing earnings (loss) attributable to common stock- holders by the weighted average number of shares of Common Stock and their equivalents (Class A and Class C Common Stock) outstanding during the period and, if dilutive, shares issuable upon the exercise of stock options. The $3.625 Series A Convertible Preferred Stock and the 8% Series R Cumulative Convertible Preferred Stock are not common stock equivalents for primary share computations.

Fully diluted earnings per share in the first and second quarters and for the full year of 1995 assumes the conversion of the 8% Series B Cumula- tive Convertible Preferred Stock. In 1995, the $3.625 Series A Convertible Preferred Stock and the 11% Convertible Subordinated Debentures were anti-dilutive for Fully diluted earnings per share calculations.

Fully diluted earnings per share for the 1994 and 1993 periods were anti-dilutive; therefore, the amounts for primary and fully diluted earnings are the same.

Pvesentation U~iless otherwise indicated, all amounts arc stated in millions of U.S. dollars. Certain prior period amounts have been reclassified to conform with the current year presentation.

2. A~guis i t ions and Oispositions Acquisitions O n October 12, 1995, the Company acquired most of the U.S. retail insurance broking and consulting business of Jardine Insurance Brokers, Inc. (the JIB acquisition) for a purchase price not to exceed $48.3 million. The Company paid $21.1 million at closing and issued nvo 6.375% promissory notes totaling $21.2 million with payments of $10.6 million due on April 9 and October 12, 1996, respectively. During the fourth quarter of 1995, the October promissory note was revalued to $8.1 million as a result of certain revenue retention criteria with respect to former JIB offices. The remaining pur- chase price of approximately $6 million is contingent on the retention of specific accounts over a four-year period ending October 12, 1999. The acquired offices generated revenues of approximately $53 million in 1994.

The acquisition was accounted for as a purchase. O f the purchase price, $44.3 milliou has been allo- cated to identifiable intangible assets (expiration lists) and goodwill. Thc expiration lists will be amor- tized over an average of niue years and goodwill will be amortized over twenty years.

O n November 30, 1993, the Company issued 2.3 million shares of its Common Stock for all of the partnership interests of Clay & Partners (Clay), a U.K.-based actuarial consulting operation. This acquisition was accounted for as a pooling of inter- ests. In connection with the merger, the Company recorded $14.4 million as additional paid-in capital representing deferred tax benefits associated with the taxable business combination of Clay.

Prior to the merger, Clay operated as a partner- ship. Accordingly, the Company's results for 1993 d o not include approximately $2.2 million for part- ners' salaries or $0.7 million for corporate income taxes. Pro-forma net income (loss) for the Company, assuming partner salaries and corporate income taxes were charged to operations, would have been $28.5 million, or $0.51 per share, in 1993.

Effective July 1, 1993, the Company acquired an 8 0 percent interest in a Mexican insurance brokerage company which was accounted for as a purchase. The purchase price was $16.9 million, including a $7.4 million cash payment and notes payable of $9.5 million due in three installments from 1994 to 1996. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $16 million.

As a result of the devaluation of the Mexican peso, the Company's accumulated translation adjust- ment balance for its Mexican operations reflected an unrealized loss of $9.5 million and $6.2 million at December 31, 1995 and December 31, 1994, respectively. However, the Company expects t o maintain its strategic investment in Mexico for the long-term and further anticipates that its Mexican operation will remain profitable. Accordingly, the Company does not currently consider its investment in Mexico to be impaired.

Dispositions O n February 28, 1995, the Company completed the sale of Alexsis Inc., its US-based third party claims administrator for tutal cash proceeds of $47.1 million resulting in a pre-tax gain of $28.7 million ($18.7 million after-tax or $0.42 per share).

During 1995, the Company sold three small operations for gross proceeds of $9.1 million result- ing in pre-tax gains totaling $1.7 million ($1.1 after-tax o r $002 per sharr).

O n November 10, 1994, the Company com- pleted the sale of its US-based personal lines insur- ance broking business. The total proceeds from the sale were $30.2 million, including $1 million in cash and a note receivable of $29.2 million due in January 1995, with a resulting pre-tax gain of $20.2 million ($12.5 million afrer-tax or $0.28 per share).

During 1993, the Company sold three small operations for gross proceeds of $9.6 million.

Pre-tax gains of $3.9 million have been recognized on the sales with resulting after-tax gains totaling $2.3 million or $0.05 per share.

These gains are included in Other Income (Expenses) in the Consolidated Statements of Operations.

Total revenues and operating income from all of these operations were $12 million, $120.9 million and $128.3 million; and $4.1 million, $10.4 million and $2.5 million, respectively, for the years ended December 31, 1995, 1994 and 1993.

3 Rest~ucturing and Spcial C h a p s In the fourth quarter of 1995, the Company recorded a $17.6 million pre-tax charge ($11.2 million atier-tax or $0.25 per share) related primar- ily to the JIB acquisition. The JIB portion of this charge amounted to $13 million, ofwhich $12.5 million reflects the anticipated costs associated with the abandonment of certain of the Company's office space and the remaining balance reflects the antici- pated costs associated with involuntary workforce reductions. The lease liability will be paid through the year 2007. The remaining $4.6 million of the charge primarily represents costs associated with other involuntary workforce reductions in the U S .

In the fourth quarter of 1994, management committed to a formal plan of restructuring the Company's operations and recorded a $69 million pre-tax charge ($45.1 million after-tax or $1.03 per share). The restructuring charge included $25.2 million t o consolidate real estate space requirements at 4 8 offices worldwide, and $43.8 million for vol- untary early retirement programs and involuntary workhrce reductions involving approximately 1,100 positions, of which 650 were in the U S .

The involuntary severance portion and volun- tary early retirement program amounted to $22.9 million and $20.9 million, respectively. Of these amounts, $8.8 million will be paid from various pension plans of thc Compa~~y . The Company paid $17.1 million and $5.7 million of the liabilities in 1995 and 1994, respectively, and expects to pay $5.2 million of the liabilities in 1996. The remain- der of the liabilities will generally be paid in the form of annuities through the year 2020.

The charge associated with real estate activities relates to the closure, abandonment and downsizing of office space globally. The costs primarily include remaining lease obligations and write-offs of lease- hold improvements and fixed assets. The Company paid $9.3 million and $1.2 million of these liabilities during the years 1995 and 1994, respectively, and has written off assets of $2.7 million during 1995.

thirty-five

Thc Company expects t o pay $3.8 million of the liability in 1996. The remainder of the liability will be paid out over the remaining lease periods, which extend through the year 2009.

In the fourth quarter of 1994, the Company recorded pre-tax special charges of $69.7 million ($45.3 million after-tax or $1.03 per share). These charges, which are reflected in non-operating results, include a $32.5 million settlement in January 1995 which resolved certain indemnifica- tion obligations relating t o the 1987 sale of Shand Morahan & Company (Shand) and a $37.2 million increase to the Company's pre-existing reserves, based on settlement discussions which led t o a March 1995 settlement agreement with the rehabili- tator of Mutual Fire, Marine & Inland Insurance Company, (Mutual Fire). See Note 14 of Notes to Financial Statements.

4. Other Income (Exoenses) Other income (expenses) consists of the following:

For rhe Years Ended lkcrrnher 31, 1995 1994 1993

Gains on salcs of

hurinrssrs (See Note 2 ) $30.4 $20.2 S 3.9

Litigation costs (0.1) (9.1) (20.2)

Other .- 2 . 4 (0.2) 0 . 7

$32.7 $10.9 S(15.6)

Litigation costs are associated primarily with the Mutual Fire lawsuit described in Note 14 of Notes to Financial Statements as well as a 1993 settlement of certain other litigation matters.

5. Income laxes Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of adopting this standard increased 1993 net income by $3.3 million or $0.08 per share. Tax benefits of $3.2 million were also allocated to paid-in capital representing the differ- ence in the tax bases over the book bases of the net assets of taxable business combinations accounted for as pooling of interests. These benefits would have been recognized at the respective dates of combination if SFAS No. 109 had bccn applied at that time.

Thc components of income (loss) from continu- ing operations beforc income taxes are as follows:

For rhc Years Endd l>ecemher 31. 1995 1994 1993

Unircd Srdrcs $ 37.4 Si200.9) S(74.2)

Intemarional 118.6 5 4 1 1061 S156.0 < I l d l r R \ 21 q

'The components of the provision (benefit) for income taxes on continuing operations are as follows:

For rhc Years F.ndrd lkcemher 31, 1995 1994 1993

Current:

Fcdcral $(17.7) $ 1.7 5 (0 .2 )

Srm and local 1.9 (0.7) ( 0 8 ) International 40.7 33.9 34.9

~

24.9 34.9 33.9

Deferred:

Fcderal 28.7 (67.3) (28.7)

Srarc and locrl - (3 .6 ) (2.0)

lnternarional 7 .3 (6.6)>2

A reconciliation of the tax provision and the amount computed by applying the U.S. federal income tax rate of 35% t o income (loss) from con- tinuing operations before income taxes is as follows:

For rhc Ycan Endcd Dcccmhcr 31, 1995 - - p~ - -

Cornporcd "erpc<tcd" tar

rrprnne (hrnrfir) $54.6

Sratc and hrral incomc rares-

nct of federal income tar 1.2

Foreign srarurory ratcs under

US. kdcral srarurory rarc (0.4)

Foreign partnership income nor raxrd -

Tax hmelir o f capital lorses -

Tar rare changes - Adjusrmenr r o prior year car provisions -

Amorrizarion of inrangiblc asscrs 2.6

I I hdcrd income tar on foreign

earnings, nrr ofcredirr 0 .9

Orher non~deducrihle expenses 4 . 2

Ocher, net -- (2.2) 2 .6 (0.4)

Actual rax cxpensc (hcncfir) $60 .9 S(42.6) S 6.4

Federal income taxes have not been provided on undistributed earnings of foreign subsidiaries which aggregated approximately 5364.6 million at December 31, 1995, because such earnings are per- manently invested or will not be repatriated unless any additional income taxes would be substantially offset by foreign tax credits. It is not practicable to determine the amount of unrecognized deferred income tax liabilities on these undistributed earnings.

Deferred income taxes reflect the net tax effects of temporary differences benveen the carrying value of assets and liabilities for financial reporting pur- poses and the amounts used for iucome tax purposes as well as loss and tax credit cnrryforwards.

The following is a summary of the sigr~ifican~ components of the Company's gross deferred tax assets and liabilities:

As of Dcccmbcr 31. 1995 1994 ~~p~

Deferrcd tar asscts:

Ikfcrrcd cornpensaim S 9.2 6 10.2

Rrsrructoring charges 11.0 19.6

Slund/Murual Fire rcsrircs - 30.9

Capital loss carrvfurwards 13.2 16.7

Nrr oprrating loss and tar

credit carryfirwards 63.1 63.6

Business comhinarions 16.5 17.1

Other accruals nor

wrrcntlg drducriblr - . . ~ 7 8 . 6 8 1 . 5

191.6 239.6

Less: Valuation allowancr (35.2) (36.7)

Toral dcfcrrcd n x asscts 156.4 -. 202.9

Dcferret n x liahilitics:

1)cArrrd cumrnissmns 8.6 9.6

I>eprcciarion 2.2 3.0

Grins on scrrlcmcnr of prnsion

liabilirics, ncr of accruals 22.7 19.7

Gain on salc ofprrsonal

liner business - 11.3

Tax lcascs 10.5 139

Orhcr accruals 15.3 8.7

Total dcfcrrcd tar liahilitirs 59.3 66.2 ~ -

P I 3 6 7 Net dcfcrrcd tax asset $ 97.1

The deferred tax balances shownin the Consoli- dated Balance Sheets are afer reclassification of the above amounts within the various jurisdictions in which the Company operates.

As of December 31, 1995, the Company has a U S . federal net operating loss carryforward of $45 million which expires in the year 2009 and U S . state net operating loss carryforwards totaling $224.9 million which expire in various years through 2010. The Company also has U S . federal foreign tax credit carryforwards of $1 1.8 million which expire in years 1998 through 2000, and U S . federal alternative minimum tax credits of $7.5 million which can be carried forward indefinitely. In addi- tion, the Company has foreign net operating loss and capital loss carryforwards for tax purposes of $12.2 million and $31.3 million, respectively, which can be carried forward indetinitely and approxi- mately $7 million of foreign net operating losses which expire in various years through 2009.

The Company expects that sufficient taxable income will be generated in future years to realize the U S . federal net operating loss and tax credit car- ryforward~ and, therefore, the Company believes that a valuation allowance is not necessary for these amounts. The $35.2 million valuation allowance at

December 31, 1995 rclatcs primarily to hreign and U.S. state net operating loss and capital loss carry- forwards. Tlic valuation allowance decreased by a net amount of $1.5 million in 1995, of \\4iich $3.5 million relates to a decrease in foreign capital loss carryforwards and $2 million to increases in foreign and U.S. state net operating losses.

Although timure earnings cannot be predicted with certainty, management currently believes that realization of the net deferred tax asset is Inore likely than not. The net U S . deferred tax asset would be realized with average future annual earnings cqui\,a- lent to 1995 results, excluding nonrecurring items and sold subsidiaries and husincsses.

During 1994, the Company was advised that the Joint Committee o n Taxation had approved the agreement reached in 1993 by the Company and the Appeals Office of the Internal Revenue Service (IRS) on settlement of tax issucs with respect to years 1980 through 1986. Also during 1994, thc Company reached an agreement with the 1 1 s o n settlement of the examination of years 1987 tliroogh 1989. O n February 28, 1995, the Company paid the amounts due for such years and charged the tax and net interest totaling $35.6 million against prcvi- nusly rstablished reserves.

The Company is currently under examination by the IRS for pears 1990 and 1991. In 1994, the Company received a Notice of Pruposrd Adj~~sr- ment from the IRS proposing an increase in taxahle incomc for the 1991 year which, if sustained, would result in an additional tax liability estimated by the Company at $50 million, excluding interest and penalties. This proposed adjustment relates to intercompany transactions involving the stock of a U.K. subsidiary.

The Company disagrees with the proposed adjustment and has rcqi~ested advice from the IRS National Office on this issue. The Conipany current- ly believes that the National Office review should be completed in the first half of 1996. Although the ultimate outcome of the matter camot be predicted with certainty, the Company and its indcpcndent tax counsel believe there are substantial arguments in support of the Company's position and that the Company should prevail in the event that the issue were to be litigated.

A similar set of transactions occurrcd in 1993. Depending on the outcome of the IRS National Office review of the 1991 issue, the IKS crx~ld pr<)- pose an increase in 1993 taxable income which would result in an additional tax liability estimated by the Company at $25 million, excluding interest and penalties. The Company's 1993 tax return is not cur- rently under examination. The Company hclie\rs it should prevail in the event this similar issue is raised hy the IRS. Accordingly, n o provision for any liability

thirty-seven --

with respect to the 1991 and 1993 transactions has been made in the consolidated financial statements.

The Company believes that its current tax reserves arc adequate to cover all of its tax liabilities.

6. Oiscontinued Ooerations In 1985, the Company discontinued its insurance underwriting operations. In 1987, tlie Company sold Sphere Drake Insurance Group (Sphere Drake). The Sphere Drake sales agreement provides indem- nities by the Company t o the purchascr tbr various potential liabilities including provisions covering future losses on certain insurance pooling arrangc- ments from 1953 to 1967 between Sphere Drake and Orion Insurance Company (Orion), a U.K.- based insurancc company, and future losses pursuant to a stop-loss reinsurance contract between Sphere Drake and Lloyd's Syndicate 701 (Syndicate 701). In addition, the sales agrccment requires the Com- pany t o assume any losses in respect of actions or omissions by Swann & Everett Underwriting Agency (Swann & Everett), an underwriting man- agement company previously managed by Alexander Howden Group Limited (Alexander Howden).

The nct liabilities of discontinued operations shown in the accompanying Consolidated Balance Sheets include insurancc liabilities associated with the above indemnities, liabilities of insurancc under- writing subsidiaries currently in run-off and other related liahilities.

A suniniary of the net liabilities of discontinued operations is as follows:

As of Dcccmhcr 31, p~ --- -~

1995 1994

l.i.~l~ilicics:

Insuran~r liahilitics $257.1 $277.6

Asscrs:

Rccovrrrblc ondcr tinirc risk cwnrncrs:

Inrurancr li~abililio 126.4 135.7

Prcmium adjosrmcnr 9.8 10.8

Rcinsurrocc rcco\.crables 51.6 64.2

Cash and in\.crrmcnrs 27.2 23.6

Orhcr -~

9.3 10.9

Total assrrs p~ --

224.3 - ~~p~

245.2

Total ncr liabilirics of disconrinocd opcrarions 47.7 6 3 8

Lcss current portion classified as other

accrucd rrpcnscs - - --

14.3 -p

7.0

Rcmaindrr classiticd as ner liabiliricr of

discontinued openthms .$ 33.4 S 56.8

The insurancc liabilities represent cstiniates of future claims expected to be made under occurrence- based insurance policies and reinsurance business written through Lloyd's and the London market covering primarily asbestosis, environmental pollu- tion, and latent disease risks in the United States which are coupled with substantial litigation ex- pmses. These claims are expected to develop and be settled over the next twenty to thirty years.

Liabilities stemming from these clain~s cannot be estimated using conventional actuarial reserving techniques because the available historical experience is not adequate to support the use of such tech- niques and because case law, as well as scientific standards for measuring the adequacy of site clean- up (both of which have had, and will continue to have, a significant hearing on tlie ultimate extent of the liabilities) is still evolving. Accordingly, the Company's independent actuaries have combined available cxposure information with o t l~e r relevant industry data and have used various projection tech- niques t o estimate the insurance liabilities, consisting principally of incurred but not reported losses.

In 1994, Orion which has financial respon- sibility for sharing certain of the insurance pool liabilities, was placed in provisional liquidation by order of the English Courts. Based on current facts and circumstances, the Company believes that the provisional liquidation will not have a material adverse effect on the net liabilities of discontinued operations.

The Company has certain protection against adverse developments of the insurance liabilities through two finite risk contracts issued by Centre Reinsurance (Bermuda) Limited (reinsurance com- pany). A contract entered into in 1989 provides the insurance underwriting subsidiaries currently in run- offwith recoveries of recorded liabilities of $76 million, and for up to $50 million of additional recoveries in excess of those liabilities subject to a deductible for one of the run-off companies of $15 million. At December 31, 1995, based on an esti- mate by an independent actuarial firm, the Company had recorded $13.5 million of the deductible.

O n July 1, 1994, the Company entered into an insurance-based financing contract (finite risk contract) with the reinsurance company providing protection primarily for exposures relating t o Orion, Syndicate 701 and Swann & Everett. The contract provided for the payment by the Company of $80 million, $50 million of which was borrowed from the reinsurancc company, and for payment by the Company of the first $73 million of paid claims. The contract entitles the Company to recover paid claims in excess of the Company's S73 million retention.

~ ~

At December 31, 1995, recoveries were limited to

$115.2 million, which includes the Company's payment of $80 million. In addition, commencing December 31, 1996, depending o n the timing and amount of paid loss recoveries under the contract, the Company may be entitled t o receive a paymmt from the reinsurance company in excess of the amounts recovered for paid losses if the contract is temminated. The contract is accounted for under the deposit method of accounting and the accounting require- ments for discontinued operations.

The Company's right t o terminate the contract entered into in 1994 is subject to the consent of American International Group, Inc. (AIG) as long as AIG is the holder of certain shares of the Com- pany's stock. In addition, the reinsurance company also has the right, under certain circumstances, all of which are under the Company's control, to ter- minate that contract.

The insurance liabilities set forth above repre- sent the Company's best estimates of' the probable liabilities based o n independent actuarial estimates. The recoverable amounts under the finite risk con- tracts, which are considered probable of realization based on independent actuarial estimates of losses and pay-out patterns, represent the excess of such liabilities over the Company's retention levels. The premium adjustment represents the recoverable amount considered probable of realization at the earliest date the Company can exercise its right t o terminate the finite risk contract covering the insur- ance underwriting subsidiaries currently in run-off.

Changes in the total net liabilities of discontin- ued operations are as follows:

For t h e Yeam Endcd December 31, 1995 1994 ~p

1993 Beginning balancr $63.8 5113.5 $102.4

Provisions for loss - 28 .9 - Litigaciun rcrrlcmcnr - - 22.3

Net cash procceds on rhr zero

coupon notes - 5 . 0 - Claims and expense paymcnrs (7 .3 ) ( 7 . 0 ) (11.9)

Paymcnr for a finite risk contract - (80.0) - Nrr capiral infurion (3.0) - - Tax scttlemenr (5.8) - - Othcr - 3.4 -

Translation adjurrmrnt - - - 0 . 7 Ending balance $47.7 $ 63.8 $113.5

The 1994 provision for loss of $28.9 million includes a $6 million charge associated with the 1994 finite risk contract, a $20.9 million charge relating to an agreement that resolved certain indemnity obligations t o Sphere Drake and a

$2 million charge recorded in the fourth quarter of 1994 related t o other liabilities. Under terms of the Sphere Drake agreement, the Company received a cash payment of $5 million in settlement of the zero coupon notes receivable and related indemnities as well as certain income tax liabilities.

While the insurance liabilities set forth above represent the Company's best estimate of the proba- ble liabilities within a range of independent actuarial estimates of reasonably probable loss amounts, there is no assurance that further adverse development may not occur due to variables inherent in the estimation processes and other matters described above. Based o n independent actuarial estimates of a range of reasonably possible loss amounts, liabilities could exceed recorded amounts by approximately $170 million. However, in the event of such adverse development, based on independent actuarial esti- mates of pay-out patterns, up t o approximately $130 million o f this excess would be recoverable under the finite risk contracts.

The Company believes that, based on current estimates, the established total net liabilities of discontinued operations are sufficient to cover its exposures.

7. ~molovees' Retirement Plans ad Benefits Pensinn Plans The Company has contributory and non-contributory defined benefit pension plans covering substantially all employees. The plans generally provide pension benefits that are based on the employee's years of service and compensation prior to retirement. In general, it is the Company's policy t o fund these plans consistent with the laws and regula- tions of the respective jurisdictions in which the Company operates.

Total pension costs are summarized as follows:

For thr Y e m Endcd Ikccmber 31, 1995 1994 1993 ~~~~p~ --

Service cost $ 23 .8 $ 38.8 S 29.5

Intrrcsr cost 46 .2 43.4 38.4

Actual rcrurn on plan assets (127.9) 22.7 (73.4)

Net amortization and dcferral -- 55.8 (99.7) 7.4 Net pension costs (crcdir) $ (2 .1) S 5.2 S 1.9

During the first quarter of 1995, the Company realized a pension curtailment gain of $4.4 million due to the sale of Alexsis Inc. (see Note 2 of Notes to Financial Statements).

The hllowing tahle sets forth the funded status services. The Company previously expensed the cost and amounts recognized in the Company's of these benefits, which are principally health care Consolidated Balance Sheets: and life insurance, as premiums or claims were paid.

The statement allowed recoenition of the cumula- L,

AS of ~ c ~ c m b e r 31, 1995 1994 tive effect of the liability in the year of the adoption U.S. Int'l U.S. Inr'l or the amortization of the obligation over a period

Vcrtrd bmcfir ohlignrion 16 289.5 $ 277.1 5 199.1 S 247.1 O f U p years. The Company elected to rec- Accumolafcd bcncfir ognize the initial postretirement benefit obligation

ohiigarion $ 299.6 $ 278.5 $ 223.3 S 248.7

Prolccrcd henelit of $14 million and $5.9 million tbr its U S . plans

obligation S(351,81 S(29R,91 S(271,61 $(270,31 and international plans, respectively, over a period

plan assets at hir of twenty years. ~ ~~~ ~~ ~~~

markcr valuc 344.5 427.1 289.3 383.7 Total postretirement benefit costs arc summa Exccrs (shortfall) of plan rized as follows:

arscrr over proiecr~d

hcnrfif obligation (7.3) 128.2 17.7 113.4 For the yeas endrd Dcccmber 31, 1995 1994

Unrrcognired nct U.S. Int ' l U.S. Ihss (gain) 18.2 (33.5) (5.5) (26.8) Scrvicc cost $ 0.5 $0.3 SO.R

Unrccognircd prior Inrcresr cosr 1.5 0.6 1.5

srrvic~ cosc 0.1 (6.2) (1.3) (6.6) Acrual return on plan assets (0.6) - 0.2

Unrccosnizcd net aacrs Ncr amorrizarion and drfrrral 1.0 0.3 0.6

being amorrizcd over Ner pontrctircmenr cosrs $ 2.4 $1.2 S3.l rhc plans' wcrrge

i i s i c I (11.6) (26.91 (14.01 (29.4) ~h~ following table sets forth the funded Prepaid (accrued) and amounts recognized in the Company's consoli-

pmrion cost $ (0.6) $ 61.6 $ (3.1) $ 50.6 dated financial statements:

Assumptions urcd werc

as follows: As of l>cccmhcr 31, 1995

Asstzmrd discounr rare 7.0% 6.0-9.0% 8.5% 6.5-YS'X, 1994

US. Int'l U.S. Asatmcd rare of

Accumulated portrcrirerncnr rompcnation incrrarc 4.5% 355.0% 5.0% 3.5~5.0%

bcncfir obligation: Expecrcd r m of rcrurn

Rcrircrs on plan arsrrr 9.75% 7.0-10.75% 975% 7.0-1025% S(14.0) $(2.9) S(11.0)

Fully cligihlc actiw parficipanrs (1.91 (1.0) (3.1)

At December 31, 1995 and 1994, approximately 75 percent and 76 percent, respectively, of all plan assets are invested in equity securities and 25 per- cent and 24 percent, respectively, in cash equivalents and/or fixed-income securities.

Thrift Plans The Company maintains thrift plans for most U.S. and Canadian employees. Under the thrift plans, eligible employees may contribute amounts through payroll deduction, supplemented by Company contributions, for investments in various funds estab- lished by the plans. The cost of these plans was $9.1 million in 1995, $11.9 million in 1994 and $11.3 million in 1993.

Pumetivement Benefits The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993 for its U.S. plans and effective January 1 , 1995 for its interna- tional plans. This statement requires the Company to accrue the estimated cost of future retiree benefit payments during the years the employee provides

. . Orhcr acrivc participants (5.3) (2.81 (5.4)

(21.21 (6.71 (19.5) Nan assets at fair markcr wlue 5.8 - 5.4

Accumulared benrfit obligation

in excess of plan asscrs (15.41 (6.71 (141)

Unrecognized nct ohligarion 8.7 5.7 11.7

Unrccugnized nrr loss -. 2.8 0.2 1.9

Accrucd postretirement bcncfir liahiliry $ (3.9) S(0.8) $ (0.5)

Arsunmtionr used wcrc as hllowr:

Asumcd discount rate 7.0% 8.5-9.0% 8.5%

Assumed mrc of compensation increase 4.5% 4.0-5.0% 4.5%

Expected rate o f rcrurn on plan asrers 5.75% - 5.75%

Assumed medical trend rarc-

1996 and aftcr 9m55% 115mZ5% IOto5.5%

The amounr of a 1% incrcnre in

arsurnrd wend rare on:

Aggregate ufscrvicc and inrerest cost $ 0.2 $ 0.2 S 0.2

Accumularcd postretirement

bcncfir oblipation 1.2 0.9 1.2

During the first quarter of 1995, the Company incurred a postretirement curtailment loss of $2.8 million due to the sale of Alexsis Inc.

Postemployment Benefits Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers Accounting for Post- employment Benefits." This statement requires that certain benefits provided to former or inactive employees after employment but prior to retire- ment, including disability benefits and health care continuation coverage, be accrued based upon the employees' services already rendered. The cumula- tive effect of this accounting change was an after- tax charge of $2.6 million or $0.06 per share in the first quarter of 1994.

Dcfewed Comnpensation Plan The Company has a deferred con~pensation plan which permitted certain of its key officers and em- ployees to defer a portion of their incentive com- pensation during 1986 to 1989. The Company has purchased whole life insurance policies on each par- ticipant's life to assist in thc funding of the deferred compensation liability. At December 31, 1995, the cash surrender value of these policies was $0.6 mil- lion, which is net of $44.9 million of policy loans. The Company's obligation under the plan, includ- ing accumulated interest, was $16 million and $16.2 million at December 31, 1995 and 1994, respectively, and is included in Other Long-Term Liabilities in the Consolidated Balance Sheets.

I. Oeht

Consolidated short-term debt outstanding is as follows:

As of Dcccmhcr 3 1, ~p -

Liocs of crcdir

Notes payable (A) --

19.0 pp -

0.3

$19.1 s 1 .(I

The weighted average intcrest ratc 011 short- term borrowmgs was 6.5 pcrccnt and 7.0 pcrccnt at December 31, 1995 and 1994, rcspectivcly

Consolidated long-term debt outstanding is as follows:

The principal payments required during thr near five years arc $9.3 million in 1996, $18 million in 1997, $47.8 million in 1998, $17.4 million in 1999, and $15.9 n~illion in 2000.

A. Cuwent Notes Payable In connection with the J I B acquisition on Octobcr 12, 1995, the Company issued nvo 6.375% promis- sory notes totaling $21.2 million with payments of $10.6 million due o n April 9 and October 12, 1996, respectively. l h r i n g the fourth quarter of 1995, the October promissory notc was revalued t o $8.1 million in accordance with the revenue rcten- tion criteria h r the former JIB oftices stipulated in the purchase agreement. (See Note 2 of Notes to Financial Statements.)

B. 11% Convedble Subordinated Debentures O n October 13, 1995, the Company redeemed all $60.2 million of its outstanding 11% Convertible Subordinated Debentures due 2007 together with accrued interest and a $0.9 million redemption prcmium. This redemption was primarily funded by the Company through the borrowing of $60 million under its revol\ing long-term credit facility. (See Item F.)

C. Notes Payable As a result of thc Mutual Fire scttlcmcnt as de- scribed in Note 1 4 of Notes to Financial Statements, the Company issued a $35 million zero coupon note in March 1995. Using a discount rate of 9.3%, the present value of the notc was recorded as a 525.9 million long-term debt obligatiun. The note is payable in six annual installments, commencing April 1, 1996. The carrying value of the outstanding prin- cipal balance, including imputed interest, of the note p~yablc at December 31, 1995 was $27.5 million.

I n January 1995, the Company negotiated the settlement of certain obligations relating t o the 1987 sale of Shand. Under the terms of thc settle- ment, the Company paid $14 million in cash, issued a five year interest bearing note in the principal amount of $14 million, which was pre-paid in June 1995, and paid a net contingent obligation of $4.5 million.

In July 1994, the Company borrowed $50 million from the reinsurance company that cxecured a finite risk contract relating n1 the Company's dis- continued operations. The note is payable in five equal annual installments, commencing July 1, 1997, and bears intcrest at a ratc of 9.45 percent. If the

Company defaults on the borrowing, the rcinsurancc company may utilize the note to settle reinsurance claims uuder the finite risk contract.

D. Obliflations Under Capital Leases The Company's obligations under capital leases con- sists primarily of lease agreements for office facilities. Future minimum lease payment obligations arc approximately $2.7 million for each of the next five years and an aggregate of $24.2 million thcreaficr.

E. Term Loans In March 1995, a U.S. subsidiary prepaid an unse- cured $10 million term loan with a bank which was due August 1995.

F. Credit Agreement O n March 27, 1995, the Company's then existing credit agreement was replaced by a new $200 mil- lion three-year facility with various banks which expires in March 1998. The agreement providcs for unsecured borrowings and for the issuance of up to $100 million of letters of credit, and contains vari- ous covenants, including minimum consolidated tan- gible net worth, maximum leverage and minimum cash flow requirements. The Company currently believes that the covenant regarding minimum cash flow coverage is the most restrictive. The covenant requires that the Company's ratio of profits hetiwe taxes, interest expense and depreciation and aniorti- zation to interest expense and cash dividends exceed 4.25 at all times. The Company's ratio was 6.85 at December 31, 1995. In addition, the occurrence of a "Special Event" under the terms of the Series R convertible preferred stock purchase agreement, which, if not waived, would constitute an event of default under the new agreement. (See Note 10 of Notes to Financial Statements.) Interest ratcs charged on amounts drawn on this credit agreement are dependent upon the Company's credit ratings, the duration of the borrowings and the Company's choice of one of a number of published ratcs, in- cluding the prime lending rate, certificate of deposit rates, the federal funds rate and LIBOR.

During the second quarter of 1995, the Com- pany arranged a $10 million letter of credit under the agreement. O n October 13, 1995, the Company borrowed $60 million under the agreement to fund the redemption of its outstauding 11% Convertible Subordinated Debentures due 2007. In December 1995, the Company repaid $30 million of its long-term revolving credit agrecment borrowings. The interest rate on the remaining $30 million is 6.3125 percent as of December 31,1995. The Com- pany borrowed $10 million under this agreemcnt in January 1996 and an additional $20 million in February 1996.

Supplelnc~ning the credit agreement, the Company has unsecured lmes of crcdit availahle f o r general corporate purposes totaling $87.9 million of which $87.8 million were unused as of December 31, 1995. These lines consist of uncommitted faclli- ties principally in the U.K. and Canada. If drawn, the lines bear intcresr at market rates and carry annual fees of not greater than l/2 percent of the line.

9. Stock Option and Incentive Plans Long-Term Incentive Awards The Company's 1995 Long-Term Incentive Plan (1995 LTIP) was approved by stockholders at thc 1995 annual mceting of stockholders and became effective on May 18, 1995. The 1995 LTIP includes grants in the form of non-qualified stock options and iticentive stock options, stock appreciation rights, restricted stock awards, bonus equity awards, pcrf<~rnratlce sharc/unit awards and othcr stock bascd awards.

As of thc cffcctive date of the 1995 LTIP, the Company had awards outstanding under the 1988 Long-Tcrm Incentive Compensation Plan (1988 Plan) and under the 1982 Employee Stock Option Plan (1982 Plan). Awards outstanding under the 1988 Plan include stock options, stock appreciation rights and restricted stock. Only stock option awards are outstanding under thc 1982 Plan. At Decembcr 31, 1995, 4,226,067 shares of common stock wcre available for issuance. This amount includes 538,761 shares available under the 1988 Plan.

Stock options may be granted at a pricc not less than the C~ir market value of the Common Stock on the date the option is granted and, with respect to incentive stock options, must be exercised not latcr than 10 years from date of grant and, with rcspcct to non-qualiticd options, must be exercised not later than 10 years and one day from date of grant. The 1995 LTIP also provides for replaccment options fix a limited number of key executives. In December 1995, the Company exchanged 1,358,300 stock options ranging in a per-share exercise price of $24.50 to $23.13 for stock options having an exercise price of $19.63.

The Company will adopt SFAS No. 123, "Accounting for Stock Based Compcnsation," in December 1996. The Company has elected to con- tinue to measure compensation costs using APR Opinion No. 25 and accordingly will provide the disclosures required by SFAS No 123.

forty-nvo

Stock option transactions wcre as follows:

Number Option Pricc of Pri Share

Sharcs Rmgr

Oursranding,

lanuary 1, 1993 2,925,055 $17.75-$38.63

Granrrd 488,500 26.00- 27.63

Excrcircd (93,948) 1 7 . 7 5 25.38

Canceled (188,307)

Outstanding,

December 31, 1993 3,131,300 517.75-S38.63

Granted 2,361,500 14.19- 20.63

Excrciscd (5.375) 17.75

.~ Canceled (503,320)

Outstanding,

Decembcr 31, 1994 4,984,105 514 .19538 .63

Granrcd 3,006,100 1 9 . 6 3 25.63

Exrrcisrd (7,6851 1 7 . 7 5 23.13

Cnncelcd (1,841,136)

Outrtmding,

December 31, 1995 6,141,384 $14.19-$38.63

The number of options exercisable at December 31 were as follows:

Stock appreciation rights may be granted alone or in conjunction with a stock option at a price not less than the fair market value of the Common Stock at date of grant. Upon exercise of a stock appreciation right, the participant will rcceive cash, Common Stock o r a combination thereof equal to the excess of the market value over thr cxcrcise price of the stock appreciation right. Exercise of either the right or the stock option will result in the surrender of the other.

Restricted stock awards may be granted which limit the sale or transfer of the shares until the expiration of a spccificd time period. With certain specified exceptions, such awards are subject to forfeiture if the participant does not remain in the employ of the Company until the end of the restricted time period. A maximum of 940,000 shares may be issued under the 1995 LTIP. There were 202,798 shares, 308,500 shares, and 60,000 shares of restricted stock, excluding REP Awards (described below), issued in 1995, 1994 and 1993, respectively. In addition t o awards made under the 1988 Plan in 1994, 271,307 shares of restricted stock were awarded t o an executive officer to offset the loss of certain benefits from the execu- tive's prior employer when the executive joined the Company.

Bonus equity program awards (REP Awards) may be granted based o n a percentage of the cash incentive compensation otherwise payable t o a participant under any compensation program of the Company. The size of the BEP Award is determined by formula. The number of shares of Common Stock is determined by dividing the dollar amount designated for the award by the fair market value (based o n a five-day average of the Common Stock closing price) discounted by up to 25 percent. Shares subject to the REP Award are restricted as to trans- fer (generally for a pcriod of up to three !,ears) and are subject to forfeiture should thc participant termi- narc mmployment for reasons othcr than death, dis- ability or retirement during the restricted period. No REP Awards were granted in 1995, 1994 and 1993.

Performance share/unit awards may be granted based upon specified performance criteria. Upon achievement of the performance share/unit criteria, the participant will receive cash, Common Stock or a combination thereof equal t o the award. There were no performance share/unit awards made in 1995 or 1993 and 23,000 awards wcre made in 1994.

Performance Bonus Plan for Executive Officevs. The Company's Pcrformance Bonus Plan for Executive Officers (Performance Bonus Plan) was approved by stockholders at the 1995 annual meet- ing of stockholders and became effective as of January 1, 1995.

The Performance Bonus Plan establishes certain performance criteria for determining the maximum amount of bonus compensation, includ- ing BEP Awards, for those executive officers who, on the last day of the Company's taxable year, consist of the chief executive officcr and the four most highly compensated executive officers and whose compensation is deductible in the U.S. (Covered Employees). The Pcrformance Bonus Plan is designed to comply with Section 162(m) of the Internal Revenue Code of 1986, which is effective for the tax year commencing 1995, and which limits the tax deductibility by the Company of annual compensation paid t o Covered Employees in excess of $1 million, except to the extent such compensation is paid pursuant to the performance criteria established by the Performance Bonus Plan. For 1995, the compensation paid tu the one Covered Employee eligible under the Per- formance Bonus Plan, should be fully deductible t o the Company.

Employee Discount Stock Puvchase Plan The Company's 1995 Employee Discount Stock Purchase Plan (Employee Purchase Plan) was approved by stockholders at the 1995 annual meeting of stockholders and became effective as of

July 1, 1995. Eligiblc U S . eniployces niay purchase up to an aggregate of 750,000 shares of the Com- pany's Common Stock, at a price equal to the lower of the closing price of the Common Stock reportcd on the New York Stock Exchange at the beginning or m d of the offering period, discounted by up to 15 percent.

Shares purchased are limited to the numbcr of shares that can he purchased by the aggregate amount deducted from the participant's salary dur- ing a 6-month purchase period. Sharss of Common Stock purchased under the Eniployee Purchase Plan must remain in an employee's account for one year after the purchase date.

As of December 31, 1995,8 1,994 shares of Common Stock were issued under the 1995 Employee Purchase Plan, at a weighted average price of $16.15 per share. At December 31, 1995, there were 668,006 shares available fix issuance under the Employcc Purchase Plan.

In January 1996, the Company commenced offering to eligible employees outside the US. , the opportunity to participate in an international employee discount stock purchase plan (Plan). At the cnd of the 5-year otkring period, participants can elect to purchase from the contrihutionr savrd, shares of the Company's Common Stock at a 15 percent discount of the closing price of the Common Stock reported o n the Ncw York Stock Exchange on the first date of the 5-year offering period. Non- U.S. cmployccs who are "cxecutivc officers" of the Company, as that term is defined pursuant to Section 16 of the Securities Exchange Act of 1934, partici~ pate in a subplan of the Employee Purchase Plan on terms similar to the Plan.

Non-Employee Director Defewed Stock Ownership Plan The Company's Non-Employee Director Deferred Stock Ownership Plan ("NEDD Plan") was approved by stockholders at the 1995 annual mcct- ing of stockholders and became cRective as of January 1, 1995.

Under the NEDD Plan each nm-employee director of the Company is entitled t o a single an- nual fee or retainer (Annual Fee) for all services as a director during the period from one annual meeting of stockholders to the next. The Annual Fee is cur^

rently set at $40,000 per year. Under the NEDD Plan, in lieu of payment of the Annual Fee, the Company will generally contribute shares of Com- nion Stock t o a grantor trust established by the Company (Company Trust) equal to that portion of the Annual Fee then payable. Under the NEDD Plan, shares of Common Stock delivered to the grantor trust may not be sold for a period of one

year from the date of grant or earlier in the evmt of a change of control.

Approximately 160,000 shares of Common Stock arc authorized for issuance under the NEDD Plan which will expire on December 31, 2005. As of December 31, 1995, 50,103 shares were delivered to the Company's trust under the NEDD Plan. Of that number 24,285 shares were delivered in con- ncction with the termination of the Non-Employee Director Retirement Plan. During 1994, 140,000 sharcs of Common Stock \'err also delivered to the Company Trust to fund a special compensation award to a non-employee director.

10. Common and Preferred Stock Authorized Capital Stock The Company has authorized capital stock of 292 million shares of five classes of stock consisting of 200 million shares of Common Stock, par value $1 .OO (Common Stock); 26 million shares of Class A Common Stock, par value $.00001 (Class A Stock); 11 million shares of Class C Common Stock, $1.00 par value (Class C Stock); 40 million shares of Class D Common Stock, S1.OO par value (Class D Stock) and 1 5 million shares of Preferred Stock, $1.00 par value (Preferred Stock).

O f the 15 million shares of Preferred Stock authorized, the Board of Directors in March 1993 designated 2.3 million shares as S3.625 Series A Convertible Preferred Stock, $1 .OO par value (Series A Convertible Preferred Stock), and in July 1994 designated (i) 6.2 million shares as 8% Series R Cumulative Convertible Preferred Stock, $1.00 par value (Series B Convertible Preferred Stock) and (ii) 1 million shares as Series A junior Participating Preferred Stock, $1.00 par value (junior Participat- ing Preferred Stock).

At December 31, 1995, the Company had 10.4 million shares of Common Stock reserved for issuance under its employee stock incentive plans; 2.3 million shares reserved h r issuance upon the conversion or redemption of Class A Stock, the Class C Stock, the Class D Stock and the Series A Convertible Preferred Stock; and 13.2 million shares of Class D Stock reserved for issuance in connection with the conversion of the Series B Convertible Prcfcrred Stock.

Common Stock Classes Each holder of the Common Stock, Class A Stock and Class C Stock is entitled to one vote for each share held on all matters voted upon by the stock- holders of the Compan!: including the election of directors. In certain instances, however, holders o f the Class A and Class C Stock vote as a group. Holders of the Class D Stock are not entitled to

vote, except that the Company's Charter cannot he amended so as to adversely affect the holders of the Class D Stock without the approval of the holders of two-thirds of such shares then outstanding. The Common Stock, Class A Stock, Class C Stock and Class D Stock do not have pre-emptive or conver- sion rights or cumulative voting rights for the elec- tion of directors and there are no redemption or sinking fund provisions applicable thereto.

Subject to the provisions of Maryland law, divi- dends on the Common Stock and the Class D Stock (when and if issued) may be declared and paid by the Board of Directors. Neither the Class A Stock nor the Class C Stock have dividend rights; however, associated with each share of Class A Stock is a divi- dend paying share (RSC Class 1 Share) issued by Rced Stenhouse Companies Limited, a Canadian subsidiary of the Company, and associated with each share of Class C Stock is a dividend paying share (UK Dividend Share) issued by Alexander Pr Alexander Services UK plc, a U.K. subsidiary of the Company. N o dividends may be declared or paid on the Common Stock, unless an equivalent amount per share is declared and paid on the RSC Class 1 Shares and the UK Dividend Shares. Accordingly, the Company's ability t o pay dividends is limited by the amounts available to the Canadian and U.K. subsidiaries for such purposes. At December 31, 1995, these amounts approximate Canadian $96.5 million or $70.9 million, assuming certain solvency tests are met under Canadian law, and 127 million U.K. pounds sterling or $196.6 million. In the event sufficient earnings are not available in the Canadian or U.K. subsidiary t o pay dividends the Company's legal structure allows it to make earnings or capital available in those subsidiaries to pay dividends.

Holders of the Common Stock, Class C Stock and Class D Stock are entitled to receive, upon liq- uidation of the Company, all remaining assets avail- able for distribution t o stockholders after satisfaction of the Company's liabilities and the preferential rights of any Preferred Stock which may then be outstanding. Holders of the Class A Stock are not entitled t o receive any dividends or liquidating or other distributions with respect t o such shares from the Company, but are entitled t o receive in respect of their associated RSC Class 1 Shares an amount in Canadian dollars equivalent to the U S . dollar amount to be paid on the Common Stock.

The Class C Stock shares are convertible at any time into, and shares of RSC Class 1 Shares are exchangeable at any time (and the Class A Stock is concurrently redeemable), for fully paid, non-assess- able shares of Common Stock on the basis of one share of Common Stock for each share of Class C Stock or RSC Class 1 Share (subject to adjustment).

I n addition, upon the happening of certain events, the Company can require such conversion. Shares of the Series B Convertible Preferred Stock are convert- ible into Class D Stock, at a conversion price of $17 per share (subject to adjustment). The Class D Stock may be exchanged for Common Stock at anytime on a share-for-share basis, provided, however, that no person is entitled to acquire Common Stock upon such exchange if after giving effect thereto such per- son has more than 9.9 percent of the combined vot- ing power of the common stock voting shares then outstanding, absent certain events. The Common Stock, Class A Stock, Class C Stock and Class D Stock have customary anti-dilution provisions.

Pvefewed Stock Sevies and Related Rights The Company has one class of Preferred Stock which can be issued in one or more series with full or limited voting rights, with the rights of each series to be drtzrmined hy rhe Roard of Directors before each issuance.

Series A Convertible Pveferred Stock. Holders of the Series A Convertible Preferred Stock are entitled t o receive cumulative cash dividends at an annual rate of $3.625 per share, payable quarterly in arrears. The shares are convertible into Common Stock at a conversion price of $31.875 per share (subject to adjustments). The Series A Convertible Preferred Stock may be redeemed by the Company on or after March 22, 1997, at $52.18 per share until March 14, 1998, and declining ratably annually to $50 per share on or after March 15,2003, plus accrued and unpaid dividends. The Series A Convert- ible Preferred Stock is non-voting, except as provided by law, and except that, among other things, holders will be entitled t o vote as a separate class with other series of outstanding Preferred Stock to elect a maxi- mum of two directors if the equivalent of six or more quarterly dividends of the Series A Convertible Stock is in arrears. With respect to dividend rights and rights of liquidation, dissolution and winding up, the Series A Convertible Preferred Stock ranks senior to all classes of common capital stock and to the Junior Participating Preferred Stock (when and if issued) and pari passu to the Series B Convertible Preferred Stock. The liquidation preference for the Series A Convertible Preferred Stock is $50 per share.

Series B Convenible Preferred Stock. Holders of the Series B Convertible Preferred Stock are entitled to receive dividends at a rate of 8% per annum payable quarterly in arrears. Until December 15, 1996, dividends on the Series B Convertible Preferred Stock are payable in kind and thereafter, at the discretion of the Company's Board of Direc- tors, in cash or in kind until December 15, 1999,

provided that if the Company at any time pays dividends in cash on o r after December 15, 1996, the Company may not thereafter declare or pay dividends in lund. The Series R Convertible Prc- ferred Stock has the same dividend rights, voting rights and rights of liquidation, dissolution and winding up as the Series A Convertible Preferred Stock. In addition, however, following the occur- rence of a Specified Corporate Action (as defined in the Company's Charter) holders of the Series R Convertible Preferred Stock also have the right to vote as a class with the holders of the Common Stock and the Class D Stock on all matters as t o which the holders of Common Stock are entitled to vote. A Specified Corporate Action is defined gencr- ally as an action by the Company that would permit a change in control and certain related events. For the purposes of such vote, the holders of the Series B Convertihle Preferred Stock will be deemed hold- ers of that number of shares of Class D Stock into which such shares would then he convertible.

The Series B Convertible Preferred Stock may he redeemed in whole or in part by the Company after December 15, 1999, so long as after that date the Common Stock has traded 30 consecutive trad- ing days on the New York Stock Exchange at a price in excess of 150 percent of the then effective conver- sion price. The redemption price is $54 per share until December 14,2000, declining ratably annually to $50 per share o n or after December 14, 2006, plus accrued and unpaid dividends. All redemptions are to be made pro-rata.

Holders of Series B Convertible Preferred Stock have the right t o require the Company to purchase all or any part of the Series B Convertible Preferred Stock then held by such holders upon the occur- rence of a Special Event. A Special Event consists of actions solely within the control of the Company and includes the declaration or pa!,ments of divi- dends aggregating in excess of cumulatively 25 per- cent of earnings in 1996, and cumulatively 50 percent of earnings thereafter; the disposition by the Com- pany of assets representing 35 percent or more of the Company's book value or gross revenues; certain mergers or consolidations of the Company or any of its principal subsidiaries with or into any other firm or entity involving 20 percent or more of the total market value of the Company's cquity securities; and repurchases and redemptions of the Company's securities (other than the Company's Series R Convertible Preferred Stock) in excess of net pro- ceeds to the Company from the sale of stock (less amounts expended for repurchases and redemptions of the Company's preferred shares). Other Special Events include the acquisition by a third par: with the consent or approval of the Company, of benefi-

cial ownership of securities representing 35 percent or more of the Company's total outstanding voting power. The repurchase price in the event of a Special Event is $72.06 per share, plus in each case accrued and unpaid dividends.

Jnnior Part ic ipat in~ Pivfcrrcd Stock and Related Rights. The Company has a Shareholder Rights Plan (the "Rights Plan") designed to deter coercive takeover tactics and t o prevent an acquirer from gaining con- trol of the Company without offering a fair price to all stockholders.

Under the terms of the Rights Plan, adopted in July 1987 and as amended, one preferred share pur- chase right (a "Right") accompanies each share of outstanding Common Stock, Class A Stock, Class C Stock and Class D Stock. Each Right entitles the holder thereof to purchase one one-hundredth of a share of Junior Participating Preferred Stock.

The Rights become exercisable only bllowing the public announcement by the Company that a person or group (i) has acquired beneficial owner- ship of 20 percent or more of the Company's voting shares or (ii) has commenced a tender or exchange offer that if consummated would rcsult in the own- ership of 20 percent or more of such voting shares. Under such circumstances, if the Rights become exercisable, each holdcr will he entitled to purchase at the thewcurrent exercise price, that number of Junior Participating Preferred Stock equal to twice the exercise price of the Right. If the Company is subsequently acquired, each right will entitle the holder t o purchase at the then-current exercise price, stock of the surviving company having a mar- ket value of twice the exercise price of one Right. In addition, if a person or group acquires more than 20 percent, but less than 50 percent, of the Company's common voting shares, the Board of Directors may exchange each Right for one one- hundredth of a share of Junior Participating Preferred Stock. Rights beneficially owned by a holder of 20 percent or more of the voting shares become void once such holder passes the 20 per- cent threshold. The Rights, which expire on July 6, 1997, are redeemable by the Roard of Directors prior t o becoming exercisable at a redemption price of $.01 per Right.

In June 1994, the Roard of Directors amended the Rights Plan so that the initial acquisition of the Series B Convertible Preferred Shares, the acquisition of the Class D Stock upon conversion of the Series R Convertihle Preferred Stock, the acquisirinn of Common Stock upon exchange of the Class D Stock, or permitted acquisitions by the purchaser, its affiliates o r any transferee thereof of the Company's securities will not cause the Rights

t o become exercisable. In addition, on November 16, 1995, the Rights Plan was amended to provide for modifications of the definitions of Acquiring Person and Distribution Date to raise from 15 per- cent to 20 percent the percentage of stock ownership needed to cause a person to become an Acquiring Person or to cause a Distribution Date to occur (as such capitalized terms are defined in the Rights Agreement).

Each share of Junior Participating Preferred Stock will be entitled t o a minimum preferential quarterly dividend payment of $10 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Junior Participating Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate pay- ment of 100 times the payment made per sharc of Common Stock. Each share of Junior Participating Preferred Stock will have 100 votes, voting together with the Company's common voting shares. In the event of any merger, consolidation or other transac- tion in which voting shares are exchanged, each share of Junior Participating Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. The Junior Participating Preferred Stock shares have customary anti-dilution provisions. Rccause of the nature of the dividend, liquidation and voting rights of the Junior Participating Preferred Stock, the value of the one one-hundredth interest in a share of Junior Partici- pating Prcferred Stock purchasable upon exercise of each Right should approximate the value of one share of Common Stock. Shares of Tunior Participat- ing Prcferred Stock purchasable upon exercise of the Rights will not be redeemable.

Dividends and Di@ibutions Under Maryland General Corporation Law, the Roard of Directors of the Company may not declare or pay dividends to holders of any class of the Company's capital stock if, after giving effect to such distribu- tion, (1) the Company would be unable to pay its debts as they become due in the usual course; or ( 2 ) the Company's total assets would be less than the sum of its liabilities plus the dissolution prefer- cncc of thc holdcrs of any class or scrics of preferred stock issued and outstanding. In determining whc- ther a distribution by the Company (other than upon voluntary or involuntary liquidation), by divi- dend, redemption or other acquisition of shares or otherwise, is permitted pursuant t o the balance sheet solvency test under the Maryland General Corpora- tion Law, the aggregate liquidation preference of the Series B Convertible Preferred Shares will not be countcd as a liability. The Series B Convertible

Preferred Shares have a liquidation preference of $50 per share.

Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Invest- ments in Debt and Equity Securities." In accordance with the Statement, the Company has classified all dcbt and equity securities as available for sale. The net unrealized holding gains totaled $5.6 mil- lion and $1.5 million, net of deferred income taxes of $2 million and $0.2 million, and are reported as a separate component of Stockholders' Equity for December 31, 1995 and 1994, respectively. Net unrealized holding gains increased $4.1 million and decreased $2 million during 1995 and 1994, respectively.

At lkcember 31, 1995 and 1994, the amor- tized cost and estimated fair value of the Company's dcbt and equity securities and related financial instruments used to hedge such investments are summarized below:

Amornrcd Unmalircd Unrealixd Fair

US. t ioicnmcnr rgmcic\/

varc iauancrr 5 63.5 5 - Slll.11 5 6 3 4

Orhcr inrcresrbcating ercutirics 146.7 - - 146.7

M<lrtgagchrckd rrrunrics 83.8 - - 83.8

Eqaa? sccuririur 1 9 4 6 - 6.5

Financial m m m c n r r

urd is h c d p - 0.3 (3.1) 12.81

T m 52959 S4.9 S(3.2) 5297.6

The above dcbt and equity securities and financial instruments used as hedges are classified

In the Cunaoliddlcd Balance Sheet at December 31, as follows:

As of Lkccmhcr 31, 1995 1994 --

Cash and cash cqoi~rlcnrr:

Opcming $ 34.1 $ 63.9

Fiduciary 73.1 51.8

Shurr~rrrm inxsrmcnrs:

Opcraung 0 .3 1.8

Fiduciary 18.8 117.9

Long~term opcraring m\.csmmxr - ~

25.2 62.2 -~ -

' h f d l $151.5 $297.6

At December 31, 1995 and 1994, the arnor- tizcd cost and estimated fair value of debt securities by coutractual maturity are summarized below:

&f Lkmmkr 3 1 , 1995 1994 Estimated Eidmrrcd

Amortized Pair Aimrrirrd Far

-- ~~

Cost Value (:oat \l~luc

Duc in onr yrar or lcsr $120.8 $120.8 51.127 5152.6

Duc rfrwanc ycrr

rhrough tiw yrarr 4.8 4.8 '46.7 46.7

Duc aticr liw ycdn

through rcn ycm 10.2 10.2 0.7 0.7

l>oc aftcr tc,, K a r l 5.0 5.0 10.1 10.1

140.8 140.8 210.2 210.1

Morigrpc~hackcd rciurirics ~ - 0.0 0.0 - ~

83.8 83.8

Tuul dchr aecuritio $140.8 $140.8 $294.0 52939

Certain of the above investments with rnaturitics greater than one year are classified as short-term and included in current assets as they represent fiduciary investments that will be utilized during the normal operating cycle of the busiliess to pay premiums payable to insurance companies that are included in current liabilities.

12. financial l ns t rum~nts The Company enters into foreign cxchange tbrward contracts and forcign exchange option agreements primarily to provide risk management against exist- ing firm commitments as well as anticipated filturc exposures that will arise at its London-based special- ist insurance and rrinsurance broki~ig operations. The exposures arise because a significant portion of the revenues of these operations are denominated in U.S. dollars, while their expenses are primarily denominated in U.K. pounds stcrling.

The Company generally sells forward U S . d o l ~ lars and purchases U.K. pounds sterling for periods of up to two years in the future. Such contracts provide risk management against h tu re anticipated transactions which are not tirm comniitments. I n addition, the Company enters into foreign exchange contracts to manage market risk associated with

foreign exchange volatility on intercompany loans and expected intercompany dividends. Finally, the Company enters into foreign exchange contracts to effectively offset existing contracts when antici- pated exchange rate movements would benefit the Company.

Gains and losses on foreign eschange contracts are marked to market at each balance sheet date and arc included in other current assets or liabilities, with the rcsultilig gain or loss recorded as a component of other operating expenses. The fair market value of all foreign exchange contracts at December 31,1995, was a liability of $0.7 million.

Foreign cxchange options written by the Com- pany are marked to market at each balance sheet date and the resulting gain or loss is recorded as a component of other operating expenses. Future cash requirements may exist if the option is exercised by the holder. At Drceniber 31,1995, the Company had $20 million notional principal of written foreign cxchange options outstanding. Based on forcign exchange rates at December 31, 1995, the Company recoguized a current liability of $0.6 million, con- sisting of unamortized premiums, representing the estimated cost to settle these options at that date. At December 31,1994, the Company's forcign cxchange options could have been exercised at a nominal cost to the (:ompany.

At December 31,1995, the Company had $69.9 million notional principal of forward exchange contracts outstanding, primarily to exchange U S . dollars into U.K. pounds sterling, and $16.3 million notional principal outstanding, primarily to exchange U.K. pounds sterling into U S . dollars.

The Company has entered into interest rate swaps and brward rate agreements, which are accounted for as hedges, as a means to limit the earnings volatility associated with changes in short^ term interest rates on its existing and anticipated fiduciary investments. These instruments are con- tractual agreements between the Company and financial institutions which cxchange fixed and float- ing interest rate payments periodically over the life of the agreements without exchanges of the under^ lying principal amounts. The notional principal amounts of such agreemcnts are used to measure the interest to be paid or received and d o not repre- sent the amount of exposure to crcdit loss. The Company records the difference behvecn the fixed and floating rates of such agreements as a conipo- nent of its fiduciary investment income. Interest rate swaps and forward rate agreements which relate to debt securities arc marked to market in accordance with SFAS No. 115. At December 31,1995, an unrealized gain of $1.1 million on interrst rate

swaps and forward rate agreements which hedgc A t December 31,1995 and 1994, the Company existing fiduciary investments was rctlected in fidu- had the following written intcrest ratc option agree- ciary cash and cq~~ivalcnts in the Consolidated ments outstanding, by year of final maturit).: Balance Sheet.

At December 31, 1995 and 1994, the Company ~ , , , f ~ ~ ~ ~ ~ ~ h ~ ~ 31.1995

has the following interest rate swaps and forward Gross ~ c r Wcighrcr Gross N c t \Vcightcd

rate agreements i n etkct , by yrar of filldl maturity: Rcc~iving Avcragc P~ying Avrrrgc Ycar Ftrcd lnrrrrrr Rarr ~ --

F w d lntcror h r c

1996 $43.2 5.41% $10.0 4.60% As ofDcccmhcr 31, 1995

1997 15.5 8.50 - -

Gross Ncr \Veighrcd Gross Nct Wcighrrd Rrcei~mr .9verwe I'ayinv Arcrrvc lYy8 1 0 0 8.50 - -

~ - - -

1997 203.2 6 68 40.0 5Yn A, ofl>cccmlxr 31. 1994 - ~- ~

1998 182.9 7.08 - - Gross Net Weighrcd Grcxr Ncr Wcighrcd

'Lbtal $776.4 713% $511.7 6.24% Rccciring Average Paying Avcrrgc Ycar F w d Inrcrrst Rarr Fired lntcrcrt Rarc

A s ot' Dcccmhci 31. 1994

Gross Ncr W~ighrcd Gross Ncr Wrighrd Rccciving Avcragc Paying Armgc

Yrar Fircd lntrrcst Rarc Fircd lntrrr,t Ratc

1995 $457.0 6.84% $2570 6.83% The above financial instruments are purchased 1996 291.9 7.30 31.2 8.85 from large international banks and financial insti- 1997 97.8 6.65 - - tutions with strong credit ratings. Credit limits are Total $846.7 6.98% $288.2 7.0% established based on such credit ratings and arc

monitored on a regular basis. Management does The Company generally enters into interest not anticipate incurring any losses due to non-

ratc swap agreements with a final maturity of three performance by these institutions. In addition, the years or less. The floating rate on these agreements Company monitors the market risk asswiated with is generally bascd upon the six-month LIBOR rate these agreements by using probability analyses, on the relevant reset dates. Forward rate agreements external pricing systems and information from banks generally have a final maturity date that is less than and brokers. two years, and use six-month LIBOR as the floating The following methods and assumptions were rate index. used in estimating the fair value of each class of

In addition, as part of its interest rate manage fi~iancial instrument. The fair values of short-term ment program, the Company utilizes various types and long-term investments were estimated bascd of interest rate options, including caps, collars, floors upon market prices for the same or similar and interest ratc guarantees. The Company generally instruments. The fair value of long-term debt, writes covered interest rate options under which the including the current portion, was estimated on Company receives a fixed interest rate. the basis of market prices for similar issues at cur^

The options are marked to market at each bal- rent interest rates for the applicable period. The fair ancc sheet date, based on the Company's estimated value of intcrest rate swaps and forward ratc agree- cost to scttlc thc options. The estimated cost t o sct- ments was estimated by discounting thc futurc cash tle the options, less any premium deferred by the tlows using rates currently available for agreements Company, is recognized as a reduction to fiduciary of similar terms and maturities. The fair value of investment income in the period when such changes foreign exchange fixward contracts and foreign in market value occur. The Company recognized exchange option agreements was estimated based a current liability of$0.3 million and $1.3 million, upon pear-end exchange rates. The fair value of representing the estimated cost toscttlc thesc options interest rate options was estimated bascd upon mar- at December 31, 1995 and 1994, respectively. ket quotes of the cost t o settle these agreements. The estimated cost to settle these agreements was The carrying amounts of the Company's other determined by obtaining quotes from banks and financial instruments approximate h i r \,aluc due other financial institutions which make a market in to their short-tcmi maturities. these instruments.

' l ' l~c l i ) l l~n\ ' i~lg tahlc prcscnts the cnrrying amount5 and thc cstimatcd fair value o f tlic (:on1

p.iny's financial insrl-urncnts that arc not 111arkcd t o market.

As of Dccrmhcr 31, 1995 - -~ ~

1994

Carrying Estimnrcd Crrming Ebtimarcd Amount Fair Valuc Amuwnr Fair Valoc - ~~

L.ong~rcrm drhr.

including

current portion $135.6 $135.8 $149.8 $1464

lnrcrrrr rrrr wapr

rnd forward rrrc

igreerncnrr - 5.1 - 15.41

13. Commitments Lease Commitments T h e Company leases property and equipment under noncancclablc operating lcasc agl-ccments \vhich expire at various dates.

Future minimum annual rentals under n o w cailcclablc opcrating leases, excluding $18.6 million o f future sublease rental income, which have been translated at December 3 1 , 1 9 9 5 closing foreign exchange rates, are as follows:

Rent expense for office space, \vhich includes property taxes and certain o ther costs, amounted t o $83.9 million, $93.6 million and $92 million for the years cndcd December 31, 1995 , 1994 , and 1993, respcctivcly.

Other Commihcnts At December 31 , 1995, tlic Company 1i.id $76.4 million o f lcrrcrs o f credit outstanding which arc required under ccrtain dgrccmcnts in the ordinar , coursc o f husincss.

14. Contingencies 'The Company and its subsidiarics arc subject t o \ , a r i ~ ous cliims and la\vsuits from both private and g o v ~ crnmcnral parties, whicll includr claims and lawsuits in the ordinal-y coursc o f business, consisting princi- pally o f allcgcd errors and omissions in connection

with the p l a m m n t o f insurance and in rendering consulting services. In somc o f thcsc c.iscs, the rcnvxiics that may he sought o r damagcs clainlcd arc \uhst.~ntial. Addition.llly, the (:ompan, and its s u h ~ sidiarics arc suhjccr t o the risk of losses resulting from the potential uncollcctibilin ol~insurancc and rcinsrlrancc halances and claims advanccs m ~ d c crn behalf of clients and indcmnitic.xion\ connected with thc salcs o f ccrrain busincsxs.

(:crtain claims asscrtcd against thc (:ompan!. and ccrtain o f its subsidiaries alleging. alnrmg other things, that certain .4lcaandcr Hmvdcn sllbsi'iidrics .icccpted, o n hchalf o f ccrtlin insurance companics, insurance o r rcinsurancc at premium lcvcl\ not comlnensurate wit11 the lcvcl of underwriting risks .~ssumcd .mci r c t n ~ c c d c d or rcinsurcd those risks wirh fin.lncially unsound rcinsul-ancc companics.

A claim isscrting these allegations is pcnding in a suit tiled in Nc\v York. In Jn action b~-ought in 1 9 8 8 against the Company and certain suh\idiarics ( ( b r n i n Undr ra~ i t c rs n t Llo?d'.~ uf I.n,rdn~i Sub.wibirig to I~ is~trancc A~rctwwit . r .ZiI.X0,55S01, ct nl. 11 Alc.xandcr ~+A lcxandc i .Sei.l'iccs I l rc . . c t a/., timncrl! captioned Doinis Ed~~'al.d]e~irri~r.af I:

Alcxnrrdrr CAlcxnndcr Earopr plr, cr a/., 8 8 (:iv. 7 0 6 0 ( R O ) (S.D.N.Y.)), pliintiffr scck cwnpcns.xory and punitivc damages, as n.cll as treble d a m ~ g c s undcr RI(X1 totaling $ 3 6 million. T h c d c h d a n t s h.ivc countcrclnimcd against ccrrain o f the plaintiffs tix contrihution. Di\co\.cry in rhis case rcmainr t o be concluded ~ n r i n o t l - i l l d.~rc ha\ bccn set. Xlanagcmcnt o f the (:ompany hclie\.cs thcl-c arc valid defense, to all the c l i m s that h \ . c hccn madr with rcspect t o thcsc acti\.itics and thc Company is v igoro~~s ly defending the pcnding .lction.

Certain orhcr claims wcrc rcsol\.cd during 1995: ( 1 ) In a Ncu. York action h n ~ u g l i t in 1985, claitns were .isscrtcd against thc (:omp.my and ccrtain subsidiaries (Pitic ?i,p i ~ m r r a r ~ c c (,'o~npatip, I.td. 1: Alt.varidcr & w A I c C ~ a ~ d ~ ~ .S~I . I~~LC.~ IILC., ~ . t nl., 85 (:i\-. 9 8 6 0 (RI'I') (S.D.N.Y.)) . 'l'hc plaintiff sought compensatory and punitivc, as wcll as rrcblc d.imagcs u n d r r RI(:O totaling apprmaimatcly $87 million, arising from allcgcd R I C O violations, c o n - mon law ti-aud, hrcach of contract . i d nogligcncc. T w o subsidiaries countcrclaimcri h r hrrach o f c c r ~ tain reinsurance contracts with the plaintiff This action was srttlcd as o f January 12, 1995 and thc action \\.AS voluntarily disniisscd in F c h r u x y 1995. T h e sct t l rmcnt amount \\.as $4.5 inillion. 'l'lic Company's portion was $2.1 million \\.hich was prc- viously rcscrvcci under its profcssion.il indemnity

p r o g r ~ m ; a n d ( 2 ) I n an Ohio ac t i on b r o u g h t in 1 9 8 5 ( T h Hiqlmn,v Eq~r;ptviriit Company ct al. I! A/c.~nirdcr Howden Iirnircd, cr nl. (Case No. 1-8501667, U.S. Bank rup tcy Court, So. D is t . Oliio, \Vcsrcrn Div.)), p l ~ i n r i f k s o u g h t compensatnry a n d pun i t i \ . c d;uiiagrs, as we l l as t r ch l c damagcs u n d e r R I ( : 0 t o t a l i n g $ 2 4 million. A d i rec ted \.crdict in t h e (:nmpany's bar \vas rea f f i rmed n n . A u g ~ ~ s t 15, 1995 b y t h e U.S. C o u r t o f A p p c a l s for thc S i x th (:ircuit.

'I'hcsc above act inns arc covered unde r t h e (:o~npany's profcssinnal i n d r m n i t y prngr.im, csccpt h r possible dam.igcs u n d c r NCO. The ( :ompiny currently he l i ewx the rcasnnahly pnssihlc lass t ha t ~ i ~ i g h r resul t t inm thcsc actions, if any, w o u l d not

b e m.ltcrial to t h e ( h n p a n y ' s f inancial pos i t i on or

results nf operations. In 1987, the C o m p a n y sn ld S h i n d , i ts domest ic

~ ~ n ~ i c r \ \ . r i t i n g man.igcmcnt suhsidiary. P r i o r to t h e s.ilc, Sl iand 2nd i ts subsidiaries h a d p r o d c d u n d c r ~ w r i t i n g management scrviccs for a n d placed insur- .incc . I I ~ r e i ~ i s t ~ r a ~ i c ~ w i t h and on beha l f of mutual Firc. hlutu.i l F i rc \\.as p laccd in rehahi l i tat ion b y the C o u r t s of the ( : ommon~vca l t l i of I'cnnsylvania in D c c c m h r r 1986. In February 1991. t hc reh.~hiliran,r c o n i t n o i c e d an i c t i o n capt ioncd Forter I. Alcsn~idcr 6- Alcvniidrr Ser~,icrr I m . , 9 1 Ci\.. 1 1 7 9 (E.D.P.1.). T h e cnmpla in t , \\.hich sough t compensatory and pon i t i v c damages, alleged that Shand and, in cert.iin rcspccts, the C o m p a n y hrcachcd dut ies to a n d a g r c e ~ m c n h n.ith M u t u a l F i rc . T h e rchabi l i rator sough t damagcs r s t ima tcd a t appl-osimatcly $ 2 3 4 m i l l i nn .

O n M a r c h 27, 1995, the Company, Shand a n d the rchab i l i ta tor cntct-cd into a set t lement ag rccmcn t w h i c h \\.as s u h s c q ~ ~ c n t l y approved b y t h e (:ourts and n ~ h i c l i tc l -minatcd thc rehahi l i tator 's l i t i ga t i on a n d rclc.iscd t h e C o m p a n y a n d Shand fmm .in! f i t r rhcr claims b y the rchahi l i tatnr. U n d c r rhc t e rms o f t h e sc t t l cmcnt , t h e C o m p a n y p a i d $12 million in cash dnd issurd a $35 m i l l i o n sia-year zero c o u p o n no tc . In .xidition, in 1 9 9 5 Shand re tu rned $ 4 . 6 million of t rusteed assets to the rc l iab i l i ta ror a n d t h e rcI1.1- hil i t . i tor has e l iminated any r i g h t of sct-otTi p r r v i - OLISI? cs t imatcd to h e $ 4 . 7 million. 'l'hc M u t u a l F i r c s x t l c m c n t ag rccmcn t includes ccr ta in f c a t u r c p ro tec t i ng the ( h m p a n y frnm po ten t i a l exposure t o cl.iinis fix c o n t r i b u t i o n b r o u g h t b y t h i r d pa r t i r s a n d c x p c ~ i x s w i s i n g out of such claims.

A l t h o u g h t h e Company's professional l i a b i l i n underwr i te rs I h a ~ d c n i c d coverage tix t h e M u t u a l Fire I.in-suit, the (:ompany has ins t i tu ted a decl.ira-

t o r y j t t dgmcn t act ion ' i t ten ip t ing tn va l id r tc co\-el-age (Alc.~nirdrr is- Alr.~nndcr Sc~,~&ci I i l c . niid A1t:unirdrr C?A/rmridrl. Inc. I! 771o.r~ (.'rf.rni,r Ulldfl.~,l.it~l..c nt Llowi:r nf'l.o~~dovr, snir\crihi~i.a to iiirnvnrrcr~ c~,idrrrccd $I? p d i ~ rivrirhr.,s X 7 Y / I ! .ZIdS(, nrid R 7 Y / I ! 35.i49 nrrd Assiciri~nzio~ri Goierali, $ .PA., N o . 9 2 (:i\-. 6 3 I 9 (F.L>.N.Y.). A l l requ i red documen ts in t h i h casc I h a ~ h c c n s u b ~ i i i t t c d t c ~ the ( h r t , a n d the (:ompan! is awai t ing a decis ion on the matter.

U n d c r t h e 1 9 8 7 . lgrccmcnt w i t h the p ~ ~ r ~ I i . i s c r of Shand, t h e (:omp.iny agrccd tn i n d c m n i 5 the purchaser .igainst ccrrain cont ingrncics, inc lud ing, a m o n g others. ( i ) los\cs ar is ing o u t of prc-sale r r . i n \~ acrions h c t r \ w n S h m d or S h ~ n d ' ~ subsidiaries, on

t h e o n e hand, and M u t u a l Firc, on t h e other, a n d ( i i ) losses ar is ing o u t of pre~s.i lc cl-l-a!-s or omissions h y Shand or Shand's suhs id ia~ ics . l 'hc (:omp.iny's o b l i p t i o n s i t t idcr t l i c indcmni t ic . i t inn p r o v i s i o n in the 1 9 8 7 sales agreement u.crc not l im i ted as r o .imnunt n r dura t i on .

S ta r t i ng i n late 1992, the purchasc~- of Sl iat id Ihd m c r r c d a n u m b e r of c l i i m s u n d e r hcrrh r l i c M u t u a l F i r c i n d c m n i t i c a t i w i pro\ . is ion 311d the errors .inti omissions i ndemn i t i ca t i on p rnv i s i nn of r h c sales agrccn ient . During 1995 m o s t of rhosc cl.iims have b c c n resol\.cd b y a scrics of sett lement aglwrmcnta, in \ .o lv ing the sc t t l cmcn t or rcle.isc nt'(;i) c la in i \ r r l a t i n g to reinsurance r ccwc rah l cs d u e to Sh.ind's sobsidiaries from h1utu.d Firc, ( b ) claims rc la r ing tn dctcr io ra t io t i of rcsrrvcs hl- business w r i t t e n b y M u t u a l F i r c 2nd ccdcd to Shand's suh\idi. lr ir\, and ( c ) a n u m b e r o f p m e n r i a l errors ~ n d omissions clainis b y t h i r d ~ p ~ r t y rc insurcrs .igainsr SI iand. Undrr thr s r t t l r m c n t agreement entered into in

January 1995, cover ing t h e c r rn rs .ind nmissions c l i i r ns h y t l i i r d - p a l - n rcinsurcrs, rhe (:onip.uiy n h ~ ta incd from the purchasers of Sli.ind 2 r c l c . ~ d t i d

limitdtion of i ndemn i f i ca t i on ob l iga t ions re la t ing to

ccrt.iin t l i i r d ~ p n r y er rors a n d o m i s s i o n claims, a n d rcs t rucrurcd the conrr.lcru.il relationship nit11 t l i c pitrchascr sn tha t t hc p x t i c s ' f i t tu rc i n t c r c t s as tn

th i rd -pa r t y c l a i nv arc m n r c closely d i g ~ i c d . l ~ l i c ( h i p i n y pa id S 1 4 million in cash. i s u c d ,i five-year i ~ i t c r c s t haring n n r c in t h e pr inc ipa l .irnr,unt of 4 1 4 millinn and cxpcctcd to pay 1 cnn t i ngcn t n h l i g ~ t i o n nf $4.5 niillion. In June 1995, the $ 1 4 m i l l i o n n o t c payable \v is prepa id in \v l io lc. 'I'hc rc11i:iining cnn t i n - g e n t n o t c p a y ~ b l c o f $ 4 . 5 n i i l l i rm was pa id in till1 in Scp tcmhc r 1 9 9 5 .

N o t w i t h x m d i n g thcsc sctt lcrncnts, the l in i i ra t ion nf ccrrain cont rac t c l h l i gd t i om .ind the r cs r ruc tu r i ng n t ' t l i c par t i rs ' r r la t innsh ip , some of the (hnp.uny's indcmni t ic . i t ion prn\. isinns u n d c r t l i c 1 9 8 7 a g l - r c ~ m c n r arc st i l l in cf fcct . .As .I rcsil l t . there remains the

possihilio o f substantill exposure under tlic i ~ i d c m nification prrxisions o f the 19x7 asrccmcnt, dl- though tlic (:ornp.~n& h.~scd on current tzlcts .~nd circumstanccs, bclicrcs the possibility o f J ~iiarcrial loss resultins +om thcsc crposurcs i s rcmotc.

I n Novcrnbcr 199.1, .i elas5 'ictirm suit \v.is filcd .ig.iinst the (:ornp.iny and twc, d its then directors and officers. Tinslcy H. Irv in i n d hiicli,icl I;. \Vliitc, i n the United States District (:our[ for tlic Southern District of N r w York undcl- the c.iprion H R I . ~ , Glicktnan I? Alc.m,rdcv C- Alc.vn,tdcr Scvi~iccr hic., cr nl. (<:i\-il Action No. 93 Civ. 7594). O n J m u i r y 6, 1995, tlic p l ~ i n t i f f tilcd a sccond .imcndcd compl.iint \diich, dmong other things, droppcri Alr. \Vhitc .is .i dctcndmt. 'l'lic sccond amcnricd complaint purports to assert claims on hcli.ilf o f a chss o f p c r s ~ n s n l i o purcliascd the Company's ( : o ~ i i ~ i i o ~ i Stock during the pcriod 1May 1, 1991 to Nrxcnibcl- 4, 199.3. alleging t1i.n during this pcriod thc (:omp.iny's financial statcmcnts contained ~ii.itcrial misrcprcscn~ t.itions ah a rcsult o f inadcqu~tc rcscrws csr.~blislicri hy t l i c (:onipmy's \uhsidi.~r!: Alcundcr <:onsulting Group Inc.. t i ~ r unhi l l~b lc work-in-progrcs. 'I'lic sccond amcndcd complaint seek\ d.ini.igcs in .In unspcciticd aniount. as well as .ittorncys' f c o and other costs, fix alleged \.iolatiwns o f Sections 10(h) and 2O(a) o f thr Securiticr Excli.ingc .4ct o f 1934. In response to the second amcndcd comphint, tlic (:omp.uny tilcd a motion to dis~niss, h 1ic.xing o n tl ic (:omp.iny'\ motion to dismiss \\..IS held on 1.inu.iry 26, 1996. O n Fcbruxy 27, 19% tlic Company's i n o t i m to dismiss w a s granted 2nd

pliintit't'n.is denied IC,KC to I~CPIC,I~. I ' l ~ i n t i f f l i ~ s until April I . 1996 t u .ippcaI i l ic wrdict. Sliould pldintitf appc.11, m.inagc!iicnt will \.igolrx~sly dc&iid tlic ~i lat tcr 2s ~ ~ i ~ ~ i . i g c ~ i i e ~ i t hclicvc\ tlicrc .ire d i d d c k ~ i w to the .~l lcgatio~i\ x t t i d i i n tlic mielided c~~i ip l . i in t . Thc (:o~np.u~y c ~ ~ r ~ c n t l y ~ C ~ ~ C Y C S tlnt this d ~ t i o l l i\ cmcrcd hy rlic (:O1llplln!'\ ~~\LII..~IICT pr.og1.1111 2nd tli.ir the rcasrm.ihly possible loss that mighi r c ~ sulr, i f any, \wu Id not he m.itcl-i.11 to rhc (:oiiip.m!'s tin.11icia1 p s i t i m i or rchi111s o f ~ ~ p c ~ - ~ i t i o ~ i s .

'fhcsc contingent liahilitic5 inwl\.c signiticmi .11ii(>111its. \VIiiIc it i\ not prnsihlc to predict with c c r ~ t.iility tlic ourco~iic ofs11cI1 co~ i t i ngc~ i t liahilitics, tlic :ipplic:ihility or dvdilahility o f c ~ v c r . l g ~ tix SIIC~ ill.lt~

tcr\ under tlic (:onip.iny's prokssiwi.il indcninity incur.incc p r o g r ~ ~ i i , 01. rlicir tinancidl impact on tlic (:wnp.iny, m.lnagcmcnt ~ L I ~ I - C I I ~ I ~ hclicvcs tliat SIICI~ i m p m will not he m,~tcri.~l rtr the (:oriipany's lin.111- cia1 pmition. Hmvcvcr, i t is pcxsihlc that l i~tul-c dcvck~p~iicnts with I-rbpccr to thcsc matters could 1i.n~ a ~ii.m~-i.il effect on t i~ turc in tc r i~ i i or ~111111.11

I-cwlts d ~ q > c r ~ i t i w i \ . L1ncIcr tlic Scrics R (:onvcrtihlc l'rcfcrl-cd Stock

h 1 ~ c ~ l . 1 ~ ~ ~ g r c e ~ i i c ~ i r , as dlllclidcd, the C:r~~iip.iliy ll.1~ .igrccd tu niakc ccrt.~in p.iynicnts to rlic pill-cli.~scr pursu.int t o iiidrmniticatimis +cn with 1-cspccr to t.ix p y m c n t \ ~ n d rcscr\.c\ in excess o f rccordcd Pi \ rcscrvcs .IS of March .31, 1994. Tlir (hinpany's p~~tcnt i . i l cxpmurcs ulidcr tlic indcninitic.ltimil i ~ i d i v i d ~ ~ d l y or in tlic .l$grcgatc, .Ire l i~ i i i tcd t<)

SlO ~i i i l l ion. .A\ .I rc \d t ( ~ f t l i i s i~idcninitic.~tioII. tlic (:oinpany 11.1s cl.issiticd 'El0 million o f the pr<,cccd\ f i r m the iss~ldl l~c o f tlic Scrics K Cwi\ct.rihlc I'rcl'crrcd Share5 oursidc stockholders' cquity until ~11cl1 time as tlic indcmnificarion~ i f .In!; i s sdtisticd or trrrnin.ltcd

1s. Business S ~ g m l n l ~ consulting services, including actuarial and benefit plan consulting services, flexible compensation con-

Segment information is provided for the Company's sulting, conimunications and manageme~it consult-

n\.o reportable industry segments, Insurance Services ing services, cxccutive planning services and human

and Human Resource Management Consulting. resource organizational analysis, as well as broker-

Insurance Serviccs operations include risk man- age services for group health and welfare coverages.

agement and insurance services, specialist insurance The tbllowing tables prcscnt information about

and reinsurance broking. the Con~pany's operations by business segment and

Human Resource Management Consulting geographical areas fix each of the three years in the

includes a variety of human resource management period ended December 31, 1995:

kvcnucs 111comc~'l Arscrs & Amortization Expcnditurcs ~ -

1995 Insurmur: xrviccr $1,0718 $1434 $2,6676 $39.4 $25.2

Human rcsourcc management consulting 210.6 100 125.5 6.1 3.0

Gcnrral corporarc - (30.7) 149.3 0.6 (0.5) . ~ -

$1,282.4 $122.7 $2,942.4 $46.1 $27.7

1991 1nsurrnr.c srrriccs $1,113.2 $(12.2) ' $2,5254 $447 $19.0

Human resource mmrgemcnt consulting 210.7 (191) 130.3 6.0 2.9

ticnrrrl corporate - (51.6) 290.0 0.5 (0.4)

$1.323.9 S (82.9) $2,9457 5.; 1.2 $21.5

1993 I ~ S L ~ ~ C C berviccs $1.1286 $ 92.9 $2.5441 $48.3 $21.0

Human rcsour'c managcmrnt consulting 213.0 (7.5) 121.4 5.6 4.0

Geographid has: Operating Opcnting Idcnrifiahlc

- ~ -~ Rcrcnucs I n c ~ r n c ~ ' ~ "

- - -~ ~

A~scrs

1995 Unitrd Sratcr S 608.2 S 36.1 S 895.5

United Kingdom 317.5 55.1 1.092.3

Canada, principrlly Rccd Stcnhourc Cur. L.rd 121.2 21.7 201.2

Othrr countries 235.5 40.5 604.1

General corponte - 130.7) 149.3 -~ ~ - -

$1,2824 $122.7 52.942.4

1994 Unircd Srarcs S 685.4 S(78.8) $ 904.2

Unirrd Kingdom 312.5 19.4 1.0658

(:anada, principally Rcrd Srcnhousr Cos. ~ r u 118.9 10.0 19!0

0 t h countries 207.1 18.1 494.7

1993 Unircd Srarcs S 727.1 $(11.8) $1,029.2

United Kingdom 315.5 M I 987.8

Cmada, principally Rccd Stcnhuii,, ..ur. LLu 120.9 13.0 208.1

Other counrrics 178.1 2 0 1 440.4

Gcocrrl corporate - (33.1) ~p~

128.3

$1.3416 5 52.3 $2,7938

rw TIx 199.5 special d,mxa rcJkrrrd ru r,z Nnrr 3 of N o m to Finanma1 St~tatrmmtr haw brrn allorarrd to thrir rrrprrri,,<~raaraphiial arm, i s 199.5, inrludirrg $16 r~zillion in the US . . $1 millio?~ i n the U.K., $0.1 millioa i n othrr iounrrirrarrd $0.5 mil1;on zn~cncra l torporarc.

c b l 7 h 1994 rrr trui tur in~ c h a r p rcftrrrd to in Note .l of N o m to Hmanrial Srarcmrnrr have brrn allocarcd m thrrr rrrpri~vrgroaraphiial w a r i n 1994, inrludi~<q $31.8 miNrnn in rhr US., S21.9milliun in r l x U K . , $4 mrNion i v (hnada. $ 6 9 miN~on in Othrr <,'ountrirrand $4.4 mi l l im i n p r r r l rorporarr.

16. Ouarterly Financial Oata (Unaudited) Quarterly operating results for 1995 and 1994 arc summar~zed brlow (in millions, except per share data).

Incumr (Inss) tiom Nct

Opcmring Opcnting Conrinoing Incomc Rcvenues Income (Loss) Opcrrtions

~ -~

19% I sr S 324.2 S 41.7 S 41.7 S 41.7

2nd 328.1 39.2 22.7 22.7

3rd 299.7 27.6 17.5 17.5

4111 - 330.4 14.2 -. 7.5 ~p

7.51*'

Year S 1,282.4 $122.7 S 89.4 S 89.4

1994 Irr S 323.0 S 5.2 S (1.8) S (4.4)

2nd 335.1 14.6 3.8 (2.2)thI

3rd 332.6 4.2 0.1 (20.8)1.)

(Lou) from Fully <:untinoing I'rimrry Ncr Dilutcd Ncr Oprntioor Earnings (1.0s~) E~rningr (Loss) Di\,idcnds

p~ -. High Luw --

1st $ .80 $ .SO S 6 9 S.025 S23X S18H

2nd 37 .37 3 6 ,025 26X 22%

3rd 2 5 2 5 2 5 ,025 25s 22%

Investor Information

Corporate Hwdyarters Alexander &Alexander Senices Inc. 1185 A\cnue of the Americas New York, NY 10036

Annual Meeting of Stockholders Stockholders are invited t o attend our annual meeting on Thursday, May 16, at 9:30 a.m., at the McCraw-Hill Building Auditorium, 1221 Avenue of the Americas, 2nd floor, New York City

Approximate lumber of Lquity Slcurity Holders As of March 1,1996, there were approximately 2,761 record hold e n of the Company's Common Stock, 453 beneticial holders of Class A Common Stock and 1,100 record holders of Class C Common Stock.

M a n g e Listings Alexander &Alexander's Common Stock is listed on the NewYork Stock Exchange (symbol: AAL) and the London Stock Exchange Ltd. (symbol: ALXA). Its Class C Common Stock is listed on the London Stock Exchange Ltd. Reed Stenhouse's RSC Class 1 Special Shares (associated with the shares of Alexander & Alexander's Class A Common Stock) are listed on the Toronto Stock Exchange and Montreal Stock Exchange.

Transfer Agents and Registrars Stockholders inquiring about security transfer matters, dividend payments, address corrections and other issues related to their accoulit should contact: First Chicago Trust Company

of New York RO. Box 2500 Jersey City, N.J. 07303-2500

The R-M Trust Company Balfour House 390 High Road Ilford, Essex IGI INQ England

Montreal Trust Company of Canada

151 Front Street West Toronto, Ontario M5J 2N1 Canada

financial and Investor Information Copies of our annual and quar- terly reports, and Forms 10-K and 10-Q may be obtained by contact ing Corporate Communications in NewYork at (212) 444-4583; facsimile (212) 444-4697, or Public & Clicnt Relations in London at 44 (171) 623 5500; facsimile 4 4 ( 171 ) 623 1178. Our internet address is alexalex@attmail.com.

Investors, securities analysts and others desiring additional tinan- cia1 information should contact Alan Kershau: Vice President and Treasurer, at (410) 363-5873; facsimile (410) 363-5300. In Europe, contact Peter R.J. Tritton, Director, Public & Clicnt Relations, Alexander & Alexander Services UK plc, at 4 4 (171) 623 5500; facsimile 4 4 ( 171 ) 626 1178.

For a complete listing of our capabilities and services, please visit our website at http://\v\w.alexalex.com.

Audimrs Deloitte & Touche 1.m

Key Company & Subsidiary Officers

James S. Horrick* P m i d c ~ t l" ( . > ~ ~ ~ ~ I C U I ; I I I I Of j i r r Alcwtdtr *AI~.vandrr/Rrrd .Smthowrc (:ompanier 1.imirrd

R. Alan Kwshaw* V i u Pi'cridet~r @- T~rarurrr Alrxandrr @ Alexnwdcr Srrvirrr he.

Dennis I.. Mahoney* k r u r i v r Vim Prrridmr

Stephen H. Mryers Vlrc Pruidmr. Ftnarm C-

Richard I? Snecdcr, Ir? Virr Prrridrnr O C o n r r d r r Alcrandrr -9AAlcxandrr Srrviccr Inr.

Board of Oirectors

Frank G. Zarb'"'" (,'hairman of'rhr Board, Pruidcnr 8 Chref Euiutivr Officcr A h a n d r r CPAlurandrr Semiicr Inc.

H. +long Baldwin Cllarrman CPChicf

Corporation

Joseph L. Dianne"*" Cbrrrmrn CP

The Honorable Gerald R. Ford""' Former Prrndrnr of the Unitrd Sfafr,

Tames B. Hurlockt' Partner & Chairman of the Manwmrnt (:ammitrrr Whrtr L* Caw

1 Ronald A. Ilcs"' D r p q Chairman ofthr Board A 8 A Slruirrr Inr. Chairman Alr*a"*" Howdcn

n Edward E Kosnik .Qnror Euivrinr Viir Prmidrnr & Chirf Financial Oflirrr Aluolndcr 8 Alrxnndtr SIrvirrr Inr .

E. Gerald Corrigan""" Chairman, Zntcrnational Adslrorr Goldman, Sarhr CP Co.

Alewander 6 Alexander Services Inc. serves clients worldwide. The listing below includes locations where we have offices, affiliates or other established servicing capabilities.

Anguilla Antigua 6 Barbuda st. John's Argentina Buenos Aires Aruba Australia Adelaide, Brisbane, Cairns, Canberra, Darwin, Gold Coast,

Hobart, Melbourne, Newcastle, Parramatta, Perch, Rockhampton, Sydney, 'loowoomba, Townsville Austria Vienna Bahamas Freeport,

Marsh Harbour, Nassau Bahrain Barbados s t . Michael Belgium Antwerp, Brussels Belile Belize City Bermuda Hamilton Bolivia La Paz

Bralil Campinas, Rio de Janeiro, Sao Paulo British Virgin Islands Road Town Eanada Calgary, Edmonton, Grande Prairie, Halifax, London,

Montreal, Ottawa, Prince George, Regina, Saskatoon, St. John's, Thunder Bay, Toronto, Vancouver, Victoria, Whitehorse,

wnnipeg, Yellowknife Cayman Islands George TOW" Ehile Santiago China Colombia Bogota C0~ta Rica San Jose CIllacaO Willemstad CVPIUS

Czech Republic Prague Denmark Djibouti Dominica Dominican Republic santo Domingo b ~ a d 0 1 Guayaquil Egypt Salvador San Salvador Fiji Nadi,

Suva Rnland Helsinki fiance Lyon, Paris, Strasbourg Germany Berlin, Bielefeld, Cologne, Frankfxt, Hamburg, Hannover, Leipzig, Munich,

Sruttgart, Wesbaden Greece Athens, Piraeus Grenada s t . George's Guadeloupe Baie Mahault Guatemala Guatemala City Guyana Georgetown

Haiti Honduras san Pedro Sula, Tegucigalpa Hong Kong Hungary Budapest India Bombay Indonesia Jakarta, Surabaya Iran Ireland Dublin Of Man

Douglas h a e l Tel Aviv Italy Genoa, Milan, Rome, bngston, Montego Bay lapan ~ o k y o

Kalakhstan Almaty Kenya Mombasa, Nairobi Kuwait Luxembourg Senningerberg Malaysia Johor

Baharu, Kuala Lumpur, Perak, Penan5 Metic0 Chihuahua, Guadalajara, Matamoros,

Mexico City, Monterrey, Puebla, Tehuacan, Tijuana Montserrat ~ 0 1 0 c ~ O 1

Netherlands Amsterdam, Rotterdam, I T h e Hague New lealand Auckland,

Blenheim, Christchurch, Dunedin, Hamilton, Hastings, Nelson, New

Plymouth, Wellington ricalaglla Managua 1 Ibadan, Kaduna, Lagos h w a y Oslo

Oman Pakistan Panama panama c i ty I 7 r l ew buinea ~ a e , port Moresby Paraguay

pel^ Lima Philippines Manila Poland Warsaw r ~ l t l l g i l l Lisbon P~El f0 Rico Hato k y !afar

Republic of Korea seoul Russia MOSCOW Saudi Arabia - ; Dammam, Jeddah, Riyadh Singapole South Africa

Johannesburg Spain Barcelona, Bilbao, Madrid St. Ki th 6 k v i ~ St. hc ia Castries St. Vintim ~ l l i name Paramaribo Swaliland Mbabane Sweden

Stockholm Swiuerland Geneva, Zurich Taiwan Taipei Thailand Bangkok Trinidad &Tobago port of Spain b4lkEV Ankara, Istanbul Turks 6 Eaicos Islands

Providenciales United Arab h i l a f e ~ Dubai United Kingdom Aberdeen, Belfast, Birmingham, Bournemouth, Bristol, Cardiff, Chelmsford,

Edinburgh, Glasgow, Grimsby, Guernsey, Harrow, Leeds, Liverpool, London, Manchester, Newcastle upon Tyne, Reading, Redhill,

Romford, Shefield, Southampton, Southend on Sea, St. Peter Port, Woking United States Albuquerque, Alexandria, Atlanta, Austin,

Baltimore, Boston, Buffalo, Burlington, Charlotte, Chicago, Cincinnati, Cleveland, Columbus, Coral Gables, Costa Mesa, Dallas, Denver,

Des Moines, Detroit, Fort Lauderdale, Fort Womh, Green Bay, Greenwich, Harrisburg, Hartford, Hazelwood, Honolulu, Houston,

Indianapolis, Kansas City, Lexington, Lincoln, Los Angeles, Louisville, Lyndhurst, Melville, Miami, Midland, Milwaukee,

Minneapolis, Nashville, New Orleans, New York, Newburyport, Omaha, Owings Mills, Pasadena, Philadelphia, Phoenix,

Pittsburgh, Portland (Me.), Portland (Ore.), Richmond, San Antonio, San Francisco, San Jose, Santa Barbara, Seattle, Shreveport,

St. Louis, Stamford, Stockton, Syracuse, Tampa, Topeka, Tulsa, Utica, Wailuku, Washington, D.C., W~nston-Salem

U.SViyinlslands St.Thomas, St. Croix hgUav Ulbekistan Tashkent VEnt l~Eh Caracas, Maracaibo,Valencia hilt Kinshasa